REPSOL

Eurobonds

Posted by colonyo (Monday, June 17, 2002)
REPSOL

NEW YORK, May 17 - Fitch Ratings, the international ratings agency, has downgraded Spain's Repsol YPF's Senior Unsecured rating to 'BBB' from 'BBB+' and the Short-term rating to 'F3' from 'F2'. The rating of the Preference Share issues made by Repsol International Capital BV has been lowered to 'BB+' from 'BBB-'. The Outlook remains Negative.
The rating actions reflect Fitch's growing concern that the crisis in Argentina, to which the group has sizeable exposure, may have a more prolonged and severe impact on performance and liquidity than was anticipated when the group's ratings were last adjusted downward in January 2002. Profitability during 1Q02 (at EUR442 million, net income before non-recurring items was down 36.5% compared to the prior year) was negatively affected by the difficult macro-economic climate and a series of measures introduced by the Argentine government, including: -- The derogation of the currency conversion regime of one Argentine peso to one US dollar; -- The decreed change in price regulations, converting tariffs previously charged in US dollars directly into pesos, and prohibiting their adjustment based on the US Producer Price Index; -- The stipulation of a 20% tax on crude oil exports, and a 5% tax on refined oil product exports (export tax on gas-oil has in the meantime been increased to 20% as well). Fitch acknowledges management's efforts to soften the impact of the crisis, for example by foregoing the payment of final dividends and cutting the 2002 capital expenditure programme by some EUR900m. The proposed sale of a 23% stake in Gas Natural has some near-term liquidity benefits, though it has longer-term implications for the diversity of the group's income profile. There exists a significant degree of risk that facors remaining largely beyond management's control may have a negative impact on future performance, , not least the possibility of additional measures taken by the Argentine government. Provisions of EUR1,288m made against the 2001 income statement (before tax and minority interests) and asset write-downs of EUR1,450m were not sufficient to fully capture the effect of the crisis: among other aspects, in view of the sharp devaluation of the Argentine peso against the US dollar in recent months (the current exchange rate exceeds 3 pesos to the US dollar). Consequently, during 1Q01 the group set aside an additional provision of EUR244m against financial expenses for part of the debt contracted in dollars by its Argentine affiliates and adjusted its shareholders equity by a further EUR1,011m. Fitch's view of the sovereign risks had until recently captured the fact that oil is traded in global US dollar-denominated commodity markets, limiting the impact of regional economic downturns on upstream results. Although this argument still partly holds, the agency considers that the introduction of the export tax and the fact that only 70% of export revenues can be kept outside of Argentina in US dollars represents a step change in terms of the group's exposure to Argentine sovereign risk. The rating action also considers Fitch's ongoing concern about the group's liquidity situation, partly as a consequence of controls that are in place on the external transfer of funds. YPF (currently rated 'B+'/Rating Watch Negative) accounted for close to half of EBITDA in 2001 (around 38% in 1Q02) while only some 14% of consolidated debt was located at the YPF level. Short-term debt obligations amount to some EUR7.5 billion, a level significantly above the organic cash flow levels forecast prior to the current crisis. Liquidity currently comprises cash and equivalents of close to EUR2.7bn, in addition to undrawn committed facilities amounting to EUR5.5bn. Although Fitch believes this level of liquidity to be sufficient for the group to service its debt, the inability to freely use cash flows generated by YPF clearly inhibits the group's financial flexibility. The abovementioned proposed sale of a 23% share in Gas Natural would reduce pressure on the liquidity situation and leverage, though this mitigation is tempered by the divestment of a stable income stream and by the further dilution of earnings outside Latin America. Despite the fact that debt at the YPF level is technically non-recourse to Repsol YPF, the ratings continue to assume a high level of support by the parent company, reflecting YPF's importance in the overall group strategy. Management's incentive to support YPF is further increased by the existence of cross default clauses in the bond documentation, which can be triggered if a Principal Subsidiary (such as YPF) defaulted on more than US$20m of obligations. Ratings at this level continue to acknowledge Repsol YPF's dominant market positions in Spain, where it refines close to 60% of all crude processed. It maintains a 45% share of the retail market, distributes nearly all the liquid petroleum gas consumed, and is by far the leader in natural gas distribution and acquisition. In addition, notwithstanding the current crisis, the group is expected to retain a strong presence in Latin America, where its 40% share of the Argentine retail market and a strong position in natural gas distribution and sales is expected to retain significant value following the current crisis. Repsol YPF's Negative Outlook reflects uncertainty with regards to the group's ability to efficiently implement its strategy in the unstable Argentine operating environment, and the maturity profile of current debt obligations. Liquidity remains the central area upon which Fitch will focus in its ongoing surveillance. The agency is aware that a large portion of credit lines contain Material Adverse Change clauses but understands that banks have so far remain committed to the group. The agency will also monitor the impact of government measures and the scope and uniformity of peso devaluation.

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