TEXT-S&P cuts Repsol-YPF to 'BBB-', outlook is negative
April 19 - Overview
-- The government of Argentina has announced the expropriation of 51% of Spain-based energy company Repsol-YPF S.A.'s share in Argentina-based oil company YPF S.A.
-- Repsol's credit metrics will deteriorate materially as YPF accounted for a significant share of group production and cash flow.
-- We are lowering our long-term corporate credit rating on Repsol to 'BBB-' from 'BBB' and our short-term credit rating to 'A-3' from 'A-2'.
-- The outlook is negative, reflecting the potential for a further downgrade if corrective actions to reduce debt do not materialize in 2012. Rating Action On April 19, 2012, Standard & Poor's Ratings Services lowered its long-term corporate credit rating on Spain-based international oil and gas company Repsol-YPF S.A. (Repsol) to 'BBB-' from 'BBB'. The outlook is negative. In addition, we lowered our short-term corporate credit rating to 'A-3' from 'A-2'. Rationale The rating action follows a decision by the government of Argentina to expropriate 51% of Repsol's share in its Argentine subsidiary YPF S.A. The nationalization of YPF will materially worsen Repsol's credit metrics. This is because YPF accounted for 40% of Repsol's 2011 consolidated group EBITDA (with gas subsidiary Gas Natural Fenosa deconsolidated), while YPF had outstanding debt of EUR2.3 billion, compared with Repsol's consolidated adjusted debt of EUR17.6 billion (with Gas Natural's proportional debt deconsolidated). In addition, the book value of YPF in Repsol's accounts was about EUR5.7 billion at year-end 2011, including a EUR1.5 billion loan provided to the Petersen group when they acquired a 25% stake in YPF. We have reassessed our view of the financial risk of the group (excluding YPF), and now consider it "significant," whereas we previously considered it to have "intermediate" financial risk. The business risk profile remains "satisfactory," in our view. In our new base-case scenario (excluding YPF and before factoring in corrective debt-reduction measures, as indicated by management), we now assume that Repsol's adjusted funds from operations (FFO) to debt will reach 20%-25% in 2012. Our base case assumes the following:
-- FFO (excluding YPF, deconsolidating Gas Natural, and using an oil price assumption of $100/bbl) in the EUR3.1 billion-EUR3.5 billion range.
-- No near-term compensation receipts in relation to YPF from the Argentine government, as we view the actual amount and timing as highly uncertain. While compensation discussions will be held, we understand any compensation will be determined by a local committee in Argentina, although Repsol has already initiated international arbitration. Our assumptions do not include any near-term repayment of the loan to the Petersen group, as repayment was dependent on cash dividends the Petersen group was to receive from YPF and which are now uncertain.
-- Negative discretionary cash flow, despite a newly introduced scrip dividend program. Ultimately, however, this will depend on the degree by which management reduces capital spending.
-- Total adjusted debt at year-end 2012 in the EUR13.5 billion-EUR14.5 billion range. At this stage, we have not factored in:
-- The disposal of the company's remaining treasury shares (5% of share capital), which we believe is less certain as a result of a fall in Repsol's equity price.
-- The fact that management has said it is considering offering preference share holders the option to exchange EUR3 billion in preferred shares into a mandatory convertible bond convertible into Repsol ordinary shares. In such a case, we estimate that our base-case FFO-to-debt ratio could rise toward 30% in 2012. Liquidity Our short-term rating on Repsol is 'A-3', reflecting our assessment of the company's liquidity position as "adequate" as defined by our criteria. The downgrade to 'A-3' from 'A-2' reflects the correlation of the short-term rating to the long-term rating under our criteria. We forecast the company's ratio of liquidity sources to liquidity uses to be about 1.5x in 2012, comfortably above our 1.2x threshold. We consider Repsol's liquidity sources in 2012 to include:
-- Cash and cash equivalents of EUR1.5 billion (excluding YPF and deconsolidating Gas Natural) as of Dec. 31, 2011, of which we treat EUR0.5 billion as tied to operations.
-- Undrawn long-term committed bilateral bank lines that we understand exceed EUR3.5 billion (excluding lines at Gas Natural and non-European subsidiaries). The company also has short-term committed bank lines of EUR0.7 billion.
-- Proceeds from issuing long-term debt of about EUR1 billion in early 2012.
-- Proceeds of EUR1.36 billion from a January 2012 disposal of treasury shares representing 5% of the company's share capital (half the treasury shares acquired late in 2011 amounting to 10% of its share capital).
-- FFO in the EUR3.1 billion-EUR3.5 billion range in 2012 (excluding YPF). These sources compare with estimated liquidity needs in 2012 of:
-- EUR2.5 billion of short-term debt at year-end 2011 (excluding YPF and deconsolidating Gas Natural)
-- An estimated EUR3.0 billion-EUR3.5 billion in capital spending (excluding YPF), compared with previous consolidated capital spending guidance of more than EUR5 billion.
-- Cash dividend payments assumed to be below EUR1 billion (on the basis of an assumed high take-up of the scrip dividend option). As far as we aware, there are no material adverse change clauses in Repsol's debt documents. It is our understanding that a EUR1 billion bond due July 2013 carries a cross-default to YPF, but according to management, no event of default exists under its terms and conditions. In addition, we believe that Repsol has full liquidity capacity to repay the bond, if needed. Finally, Repsol does not guarantee any of the debt at YPF. Outlook The negative outlook reflects Repsol's weakened credit metrics following the nationalization of YPF. In the absence of management actions, rating downside could arise, as we expect adjusted FFO to debt (excluding YPF and treating Gas Natural as an equity affiliate) to fall short of the 25%-30% range we see as a minimum for the 'BBB-' rating (using our normalized oil and gas pricing assumptions). If Repsol's management can significantly reduce debt in the coming quarters and somewhat offset the financial impact of the loss of YPF, we could revise the outlook to stable. We perceive management as committed to the investment grade rating and to strengthening the company's financial profile. Among other things, management is considering offering preference share holders the option to exchange EUR3 billion in preferred shares (which we consider debt-like) into a mandatory convertible bond convertible into Repsol ordinary shares (which we could view as equity-like). Related Criteria And Research
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 Ratings List Downgraded
To From Repsol-YPF S.A. Corporate Credit Rating BBB-/Negative/A-3 BBB/Negative/A-2 Repsol International Capital Ltd. Preferred Stock* BB BB+ Preference Stock* BB BB+ Repsol International Finance B.V. Senior Unsecured* BBB- BBB Commercial Paper* A-3 A-2 *Guaranteed by Repsol-YPF S.A. Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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