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Rating Action:

Moody's assigns A1.ar/B2 ratings to YPF's Banco de la Nacion Argentina credit facility; stable outlook

 The document has been translated in other languages

06 Aug 2018

Buenos Aires City, August 06, 2018 -- Moody's Latin America Agente de Calificación de Riesgo S.A. (Moody's) assigned a B2 local currency global scale rating and an A1.ar national scale rating to the YPF Sociedad Anonima (YPF)'s up to ARS 10 billion senior unsecured bank credit facility with Banco de la Nacion Argentina. The facility will be used for general corporate purposes. The rating outlook is stable.

RATINGS RATIONALE

YPF's B2/A1.ar ratings reflect the company's large oil and gas production and reserve size; solid cash generation and credit metrics for its rating category; its status as the largest industrial corporate and energy company in Argentina; and the linkage to the Government of Argentina, its controlling entity.

YPF's ratings are based on its underlying b2 Baseline Credit Assessment (BCA), which expresses a company's intrinsic credit risk. YPF's BCA reflects its vulnerability to the local energy policy framework, as well as the company's status as the largest industrial corporate and energy company in Argentina, where it generates the bulk of its revenues. It also considers Moody's belief that, although the company's credit metrics deteriorated during 2016 and remained stable in 2017 given an adverse operating environment, they will remain strong for the B rating category. Moreover, YPF benefits from upstream/downstream integration and other business diversification, and sizeable oil and gas reserves, including large shale resources in Argentina.

In addition, YPF's ratings reflect the application of Moody's joint default rating methodology for government-related issuers (GRI) and considers the close relationship between the company and the government of Argentina, its controlling shareholder. Moody's view includes the assumptions of i) moderate likelihood of extraordinary government support to YPF in case of need and ii) high default correlation between the company and the government. The government of Argentina's ability and willingness to provide support to YPF is measured by the former's B2 local currency rating and stable outlook as well as YPF's majority government ownership and control, in addition to the importance of the company to the Argentine economy, where it holds a dominant market position in the energy sector. In turn, while YPF accounts for only a small part of the government's revenue base, which was equivalent to about 5% in 2017, the high default correlation assumption reflects the tendency of the company and the government to be jointly susceptible to adverse circumstances that simultaneously move them closer to default. For instance, YPF derives the majority of its revenues domestically; in addition, the company and the government both share common exposure to foreign exchange rate risk.

YPF's 1.8x reported debt/EBITDA at March 2018 was low for its rating category; in addition, the company has a capital structure profile comparable to a number of its higher rated global peers. However, YPF's stated that net leverage will reduce to reach about 1.5x in 2022. The reported leverage has been close to the 2.0x limit the company has set internally, given payment delays of government subsidies, which has pressured working capital and increased funding needs.Although the company should benefit from its integrated business model, the impact of over 25% average foreign currency devaluation and inflation, on top of a rigid cost structure due to unfavorable labor dynamics in the country, will continue to affect YPF's cash flow generation. In addition, current economic conditions may post resistance to elevated fuel price increases. For these reasons, Moody's believes that YPF's leverage will remain above management's target until at least 2018.

YPF's cash and equivalents in March 2018 were USD 2.1 billion, which negatively compares to USD 2.5 billion in debt coming due until the end of 2019, although the bulk of this amount is owed to local market participants and Moody's believes that a large portion of it could be rolled over relatively easily. Most of the company's cash is held in USD in bank accounts in Argentina. The company has demonstrated ample access to both local and international capital markets to conduct liability management. In 2016, YPF raised close to USD 1.5 billion in debt. YPF usually holds USD 1 billion in cash but the company can easily operate with half of that. YPF has a weak export profile, as it exported only around 10% of revenues in the last twelve months ended in March 2018, similar to 2017. The company's foreign currency risk is high as about 75% of its debt, 35% of its capital spending and 25% of its operating costs are linked to the US dollar, which compare to the 45% of the company's revenue generated in US currency.

YPF's stable outlook assumes that, in the next two to three years, the company's credit metrics will remain at current levels, which are solid for a B rating category. Moody's believes that YPF's main shareholder, the Argentine government i) will exert no influence over the company to spend in capital expenditures or dividends beyond its operating cash flow generation capacity and ii) has incentives to maintain prices of crude and oil products at a level that makes it economically attractive for oil companies to invest to increase production and reduce the country's dependence on imports of oil products and natural gas. YPF's creditworthiness is linked to the credit quality of the Argentine government, and thus the company's ratings could be affected by changes to the sovereign ratings.

Growth in total production while maintaining strong margins and relatively low leverage could lead to an uplift of YPF's BCA. Over the medium term, an improvement in Argentina's B2 rating and YPF's demonstration of a strong financial trend could result in a ratings upgrade. However, a rating upgrade will depend on a clearer view of the new government's energy policies for the next several years and how that could affect YPF.

YPF's ratings could be downgraded if the company is unable to maintain credit metrics at least at current levels, if it losses access to credit markets, or if it lacks access to foreign currency to meet debt service obligations. The ratings could also be downgraded if the government of Argentina's B2 rating is downgraded.

YPF is an Argentina-based integrated energy company with operations concentrated in the exploration, development and production of crude oil, natural gas and liquefied petroleum gas, and downstream operations engaged in refining, chemicals production, retail marketing, transportation and distribution of oil and petroleum products. The company is 51% owned by the Argentine government and had revenues of USD 15.5 billion and total assets of USD 27.4 billion in March 2018. During 2017, the company generated over 95% of its revenues in Argentina; its operations outside of the country include exploration activities in the United States, Brazil and Chile.

The methodologies used in these ratings were Global Integrated Oil & Gas Industry published in October 2016 and Government-Related Issuers published in June 2018. Please see the Rating Methodologies page on www.moodys.com.ar for a copy of these methodologies.

Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1113601.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.ar.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

For issuers domiciled in Argentina, the regulatory report related to this rating action is available on www.moodys.com.ar.

Please see www.moodys.com.ar for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com.ar for additional regulatory disclosures for each credit rating.

Nymia C. Almeida
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