August 20, 2014
YPF issues bond at 8.75% amid high demand
State-controlled energy company YPF launched its highly anticipated 10-year global bond to raise up to US$1 billion at 8.75 percent yesterday, with the financial instrument over-subscribed more than five times.
A lower than expected interest rate and high demand set a favourable precedent for a seemingly not-too-distant issuing of sovereign bonds by the government, despite the Economy Ministry’s statement to the contrary on Sunday night.
“Three-hundred investors from around the world” were confirmed to have signed up to the financial instrument by the company, which noted this was the “largest bond ever issued by an Argentine company in history,” and added that it would help “finance YPF’s ambitious investment plan.”
Hours after YPF divulged the development, Moody’s Investors Service assigned a Caa1 global foreign currency bond rating to YPF’s bond.
The final interest rate on the global bond appeared to take even the company by surprise, coming in lower than its initial guidance of nine percent on 2024 bond, higher than the 8.875 percent for YPF’s US$500 million global bond sale in December.
In the last month of last year, YPF had carried out its first international debt issue since the government nationalized 51 percent of the company in an international bond with a fixed rate of 8.875 percent and a maturity date of five years without any guarantees, that was aimed at institutional investors. The bond saw a demand for US$2 billion.
Investor demand for the bond in New York was around US$4 billion, according to Reuters.
YPF had mandated HSBC, Banco Itau and Morgan Stanley to hold investor meetings.
The deal comes as YPF is seeking to attract investment to the vast Patagonian shale oil and gas formation called Vaca Muerta, which has been rated one of the most promising.
“In terms of its lower interest rate and longer duration, this is clearly a positive sign,” Brian Joseph, a Senior Trader for Emerging Markets at the Puente Hermanos brokerage and investment banking firm, told the Herald.
Joseph noted that YPF had tested the waters with its US$150 million and US$500 million bond launches last year, and that yesterday’s had confirmed “there is strong demand from investors around the world looking at Argentina.”
YPF Chief Financial Officer Daniel González stated that another “important step has been taken” with regard to the firm’s financing strategy, pointing to the significance of having issued bonds “on international markets in 2013 for the first time in 15 years.”
For González, this proved that the company has “access (to credit lines) and generates confidence.”
A step forward
UBA economist Mariano Kestelboim considered that the YPF bond issue was a step in the right direction in order to restore Argentina’s “balance of payments to a favourable condition,” for instance in agreeing compensation with Spanish oil firm Repsol for the expropriation of its majority share in YPF, will have strengthened both the macroeconomic horizon for the government and for companies seeking foreign investment.
Furthermore, Kestelboim argued that if the Central Bank’s foreign reserves were to increase, such a position would be made even stronger.
“The interest rate is still high, but if you look at the rate at which the country had issued debt to Venezuela (between 2005 and 2007) for US$5.1 billion,” at around 15 percent, it looks far more accessible, he continued, emphasizing that bonds in neighbouring countries were still considerably lower than yesterday’s 8.875.
José Anchorena, an economist at the PRO’s think tank, Fundación Pensar, told the Herald that the government would not be likely to take on what he regarded as “still a very high rate.”
“With a comprehensive plan for economic growth, a company like YPF should be able to have an interest rate of between two and three percent, annually,” Anchorena said.The difference seems to be an indicator of perceived risk, he added.
In rating the bond, Moody’s considered YPF’s “strong financial track record under majority ownership” and control of the Argentine government.
“Since the government of Argentina partially nationalized YPF in April, 2012,” the release states, the firm has “successfully eliminated its exposure to change-of-control and/or nationalization clauses in its debt agreements, repaid maturing debt obligations and extended the company’s debt maturity profile.”
Moody’s also warns of a “highly unpredictable operating environment” due to the government’s “history of interference in the energy sector.”
Nonetheless, despite recognizing the brief trajectory of the company under state control, the agency maintains that “one of the government’s goals continues to be to keep YPF’s financial strength intact.”