MOODY'S DOWNGRADES REPSOL'S SENIOR DEBT FROM Aa3 TO A2, CONFIRMS REPSOL'S PRIME-1 RATING AS IT SECURES CONTROL OF YPF. YPF'S Ba3 / A3 RATINGS CONFIRMED.
Moody's Investors Service today downgraded the long-term ratings of Repsol S.A. and its supported affiliates from Aa3 to A2, following the announcement that its cash bid has secured control of the Argentinian oil and gas company, YPF Sociedad Anonima. This rating action concludes a review that was initiated on January 21st 1999 when Repsol successfully bid $2 billion for a 14.99% stake in YPF and announced an integration project with the aim of a complete take-over of the company. Moody's confirmed Repsol's Prime-1 rating at the time of its initial bid for YPF and subsequently when it announced its cash bid for the whole of the company. The rating outlook is negative. At the same time Moody's confirmed YPF's existing Ba3 foreign currency and A3 domestic currency ratings.
Unable to secure its initial plan of merging the two companies through negotiation with YPF's management and shareholders, Repsol launched a cash offer for the remaining 85% of YPF shares at the end of April. The take-over has raised Repsol's debt level by approximately $13.4 billion, bringing its total debt to over $23 billion when YPF's debt of some $3.8 billion is taken into account, or in excess of 70% of its total capitalisation, a level which is inconsistent with an A-category rating. As a consequence, Repsol has embarked on a very substantial programme of equity sales and asset divestments in order to reduce the company's leverage over the intermediate term. The first stage of this undertaking is the announced $5 billion new equity issue which Repsol is currently in the process of selling. This will likely be shortly followed by a sizeable preferred stock issue. At the same time Repsol has begun an ambitious asset disposal programme with the aim of selling some $3.5 billion of non-core and regulatorily-mandated assets over the coming 18 months. In addition, Repsol plans to cut back severely on future capex plans in order to hasten debt reduction. It is Repsol's aim to reduce its gearing down to pre-YPF levels over the medium term and return to its 30% net leverage target. Moody's A2 / Prime-1 ratings are underpinned by Repsol's commitment to the reconstruction of its balance sheet as outlined. The negative rating outlooks reflect the rating agency's concerns that Repsol may find difficulty in carrying through the full deleveraging programme, as some assets may prove hard to sell at an acceptable price and as Repsol may decide to make investments beyond the scope of its strict regime. Moreover, the acquisition of YPF constitutes a substantial increase in the level of Repsol's exposure to Latin America, where some 50% of its assets will be located, including a far higher proportion of its reserves and production. While this area provides growth potential, it also increases Repsol's country risk profile. Nevertheless, Repsol retains a solid base in its domestic Spanish market as well a robust position in Argentina, has become a more balanced company in terms of upstream-downstream business mix and has the chance to realise considerable cost-savings benefits as a result of the acquisition. The A2 / Prime-1 ratings assume that Repsol successfully takes advantage of these opportunities while focusing on restoring its debt-protection measurements, a task which, in Moody's view, may prove difficult to achieve.
At the same time, Moody's confirmed YPF's Ba3 foreign currency and A3 domestic currency ratings, as the agency does not expect Repsol to support YPF's debt in any way.
Ratings affected: Repsol's Aa3 long-term debt and "aa3" preferred stock ratings were downgraded to A2 and "a3". Repsol's Prime-1 commercial paper rating was again confirmed. YPF's Ba3 foreign currency ratings and A3 local currency ratings were confirmed.
Repsol S.A., headquartered in Madrid, is an integrated oil company and is Spain's largest industrial group with 1998 revenues of some $21.2 billion. YPF Sociedad Anonima is Argentina's leading integrated oil and gas company, headquartered in Buenos Aires, with revenues of about $5.5 billion. The combined entity will be number 7-8 in the world in terms of oil and gas reserves, production and refining capacity.
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