MOODY'S DOWNGRADES REPSOL YPF'S SENIOR LONG-TERM DEBT FROM A2 TO A3, SUB DEBT FROM Baa1 TO Baa2, SHORT-TERM DEBT FROM PRIME-1 TO PRIME-2, YPF'S LOCAL CURRENCY RATING FROM A3 TO Baa1 LONG-TERM OUTLOOKS REMAIN NEGATIVE.
Moody's Investors Service today downgraded the senior unsecured debt rating of Repsol YPF and its guaranteed subsidiaries from A2 to A3. At the same time Moody's lowered the group's preferred stock rating from Baa1 to Baa2, and its short-term rating from Prime-1 to Prime-2. The outlook on the long-term ratings remains negative. At the same time Moody's downgraded the local currency rating of Repsol YPF's unguaranteed Argentine subsidiary, YPF, from A3 to Baa1 with a negative outlook. YPF's B2 foreign currency rating remains under review for possible upgrade as a result of Moody's recent decision to allow certain issuers to pierce their respective country ceilings.
Moody's said the downgrades of the Repsol YPF ratings were prompted by the group's overall slow progress on debt reduction, weak comparative debt protection measures, lower actual and projected production expectations and a country risk exposure profile which compares poorly with its peers. These rating actions conclude its review of Repsol YPF's ratings initiated on 16th July 2001.
When Repsol acquired YPF, the Argentine oil company, in an all-cash transaction in 1999, raising its debt to over $23 billion or in excess of 70% of total capitalisation, Moody's downgraded the company's senior debt to A2 with a negative outlook. The A2 was predicated on the company's ability to reduce its debt burden after the acquisition, the negative outlook reflecting the rating agency's concerns that Repsol might find difficulty in carrying through its deleveraging programme. While Repsol YPF has undertaken a sizeable equity issue and substantial disposals in its efforts to delever, net debt (excluding the May 2001 preferred stock issue which Moody's treats as quasi-debt) still stood at Euros 20.4 billion, leverage at around 47%, per the end of June 2001. Moody's acknowledges that two significant reasons for the enduring high debt level are the strength of the US Dollar against the Euro (over 90% of the company's debt is denominated in Dollars) and the delay in the sale of Enagas (the timing of which is out of the company's control). The Enagas disposal, which will generate considerable proceeds, is now expected to happen during the course of 2002. The rating agency is, on the other hand, concerned that despite record high oil prices Repsol YPF has been unable to reduce leverage to target levels over the past 18 months and has been forced to push out its debt reduction plans, the achievement of which has been made tougher by its capex overspend in 2000 and the lowering of its production expectations.
The company has, nevertheless, restated its commitment to achieve net leverage of 30-35% by 2005. Moody's is concerned that this target may continue to prove elusive, and notes that, even if the deleveraging plan now goes ahead in accordance with Repsol YPF's plan, the group will remain more weakly positioned than its peers in terms of interest coverages and debt-to-reserves measurements for several years to come. As a consequence, the maintenance of Repsol YPF's A3 rating will depend on it consistently meeting the solid improvements it anticipates. The negative outlook reflects our concern that the company may fail to do so if, among many other factors, production does not rise as projected, if oil or gas prices fall materially, if the differential between heavy and light crudes widens, or if other investment opportunities distract the company from its disciplined strategic programme.
At the same time, Repsol YPF's country risk profile is significantly less diversified and more focused on lower-rated countries than its peers. Argentina, rated Ba3 at the time of the YPF acquisition and now rated Caa1, is Repsol YPF's most notable risk concentration representing some 45% of the group's EBIT in 2000. While this high percentage is likely to diminish over time as Repsol YPF invests up- and downstream in other parts of Latin America and in Spain, the level of the company's EBIT deriving from Argentina is expected to remain at a disproportionately high level.
Repsol YPF S.A., headquartered in Madrid, is the world's eighth largest publicly-owned oil and gas company in terms of reserves and production.
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