Repsol's YPF Unit Preparing First Bond Issue Since 1998: Argentina Credit
YPF SA, Argentina’s biggest oil producer by market value, plans to return to global markets for the first time in 12 years with the sale of up to $600 million of bonds as the company aims to expand at home and abroad.
The unit of Madrid-based Repsol YPF SA will likely pay a 7 percent yield on a 10-year bond, or 400 basis points more than 10-year Repsol notes due in 2017, said Jim Harper, director of corporate research at BCP Securities in Greenwich, Connecticut. YPF bonds are rated Ba1 by Moody’s Investors Service, three levels below the Baa1 ranking on Repsol debt.
YPF increased crude output this year for the first time since 2003 even as President Cristina Fernandez de Kirchner maintained export caps that started during the 2001 economic crisis. Chief Executive Officer Sebastian Eskenazi said in a May 19 interview that YPF plans to sell $400 million to $500 million of bonds a year to grow in Argentina and expand in international markets.
“The prospect for YPF to increase production and reserves is very real,” Harper said in a telephone interview.
Bonds sold by Buenos Aires-based YPF will be “reasonably attractive” if they sell to yield about 7 percent or 8 percent, said Eric Ollom, chief emerging-markets strategist with Jefferies in New York. That would be 200 basis points above the 5.81 percent average yield for Latin American energy companies in Credit Suisse Group AG’s LABI index.
Banco Supervielle SA, the first Argentine bank to sell debt abroad since 2007, sold $50 million of bonds to yield 11.625 percent yesterday. Fernandez’s June restructuring of $12.2 billion of debt left over from the country’s record $95 billion default in 2001 is allowing lower-rated companies to seek financing.
YPF’s board approved the bond sale on Nov. 5 as part of a $1 billion debt program. The company didn’t provide more details on the offering. Repsol, which bought the company in 1998 during then-President Carlos Menem’s push to sell state assets, owns 84 percent of the YPF unit. Argentina’s Petersen Group, owned by the Eskenazi family, has a 15.4 percent stake and operates YPF.
The Argentine unit’s oil output rose 1.9 percent in the first nine months of this year from the same period a year earlier. YPF accounts for about 65 percent of Repsol’s oil production.
YPF was the best performer among Repsol units in the second quarter, with operating income soaring 364 percent as pump prices in Argentina rose by about 20 percent in the first half of 2010.
The bond sale may attract investors who are betting that the country’s next government will ease export caps. The Oct. 27 death of Nestor Kirchner, Fernandez’s husband and predecessor, increases the chances an opposition candidate will win next year’s presidential election, Harper said.
“Anyone else is likely to be more market friendly and implement policies that provide incentives for private sector investment,” he said.
The cost of protecting Argentine debt against non-payment for five years with credit-default swaps rose 8 basis points yesterday to 608, according to data provider CMA. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to debt agreements.
The extra yield investors demand to hold Argentine dollar bonds instead of U.S. Treasuries slid four basis points to 508 as of 9 a.m. New York time, according to JPMorgan Chase & Co.
Warrants linked to growth in South America’s second-biggest economy rose 0.22 cent to 14.10 cents, according to data compiled by Bloomberg. The economy may expand as much as 9 percent this year, the fastest pace in five years, the central bank said last week.
The peso slid 0.1 percent to 3.9614 per U.S. dollar.
Repsol is seeking to reduce exposure to mature fields in Argentina while boosting exploration in Brazil’s offshore Santos Basin and elsewhere to increase output. Repsol Chief Executive Officer Antonio Brufau said last month that the company wants to sell more of YPF to Argentine investors through a private offering or a share sale.
“The thing is it will take time because Argentina is a difficult place to gather funds and I don’t need investors in New York, I want local ones,” Brufau told reporters in Buenos Aires on Oct. 6.
Ollom said “Argentina has some specific challenges in that government policies haven’t been very government friendly in regard to developing oil. YPF as a business is probably less valuable today than it was 10 years ago.”
YPF may spend $3 billion to $3.5 billion a year to boost operations in Brazil, Colombia, Mexico and Canada, Eskenazi said in the May interview. Overseas sales will account for 50 percent of total revenue in 10 years, up from 30 percent now, he said.
There will likely be strong demand for the company’s bonds, BCP’s Harper said.
“There’s appetite in the market for emerging market fixed income, especially for the higher yields Argentina corporates offer, and YPF is a blue-chip company,” Harper said. “It all lines up pretty well.”
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