OREANDA-NEWS. Fitch Ratings expects to assign a rating of 'CCC' to YPF S.A.'s (YPF) proposed senior unsecured bond issuance of up to USD1.5 billion with a 10-year bullet maturity. On April 22, the company announced in the Argentine Comision Nacional de Valores (CNV) it intended to issue up to USD500 million in international bonds; however, based on increased market interest the company is now looking to issue up to USD1.5 billion. The proceeds will be used to fund fixed asset investments in Argentina and working capital requirements. The notes rank at least pari passu in priority of payment with all other YPF senior unsecured debt. The notes would be rated the same as all of YPF's senior unsecured obligations.

KEY RATING DRIVERS

YPF's ratings reflect its strong linkage with the credit quality of the Republic of Argentina and the company's relatively low reserve life. YPF's 'CCC' ratings are linked to the sovereign rating of Argentina, which has an 'RD' foreign/local currency Issuer Default Ratings (IDR). Fitch has assigned a country ceiling of 'CCC' to the Republic of Argentina, which limits the foreign currency rating of most Argentine corporates, including YPF to 'CCC'.

Country ceilings are designed to reflect the risks associated with sovereigns placing restrictions upon private sector corporates, which may prevent them from converting local currency (LC) to any foreign currency (FC) under a stress scenario, and/or may not allow the transfer of FC abroad to service FC debt obligations. Key concerns of corporates domiciled in Argentina include high inflation, government meddling, economic uncertainty, and limited access to debt markets especially after the country's recent default.

LINKAGE TO SOVEREIGN: YPF's ratings reflect the close linkage with the Republic of Argentina resulting from the company's ownership structure as well as recent government interventions. The Republic of Argentina controls the company through its 51% participation after it nationalized the company on April 2012. Following this action, the company's strategy and business decisions are governed by the Republic of Argentina.

LOW HYDROCARBON RESERVE LIFE: The ratings consider the company's relatively weak, though improving, operating metrics characterized by low reserve life. As of year-end 2014, YPF reported proved reserves of 1,212 million barrels of oil equivalent (boe) and average production of 560,100 boe per day (44% crude oil). In 2014, proved reserves grew by a healthy 12% year-over-year rate, with a 163% reserve replacement rate. Based on production trends, the company's reserve life is below-optimal at approximately six years. This factor could create significant operational challenges in the medium to long term, and justifies the company's ramped up capex program to increase upstream reserves/production.

IMPROVING PRODUCTION: The company's average production of 560,100 boe in 2014 was up nearly 14% year-over-year, driven in large part by 25% growth in natural gas production. Given the company's ambitious capital expenditure program, Fitch expects the company to continue to grow production in 2015. Production in the fourth quarter of 2014 showed an accelerating trend as it averaged 582,800 boe per day, which is 13% higher than 4Q'13 figures.

Both crude oil and natural gas production have steadily grown on a quarterly basis helped in large part by the steady growth in tight gas and shale oil production. After only two years, the Loma Campana shale oil field is the second largest producing field in Argentina with gross production increasing from 7,900 boe/day in 1Q'13 to 41,200 boe/day in January 2015.

STRONG BUSINESS POSITION: Fitch expects the company to continue to solidify its market leadership in Argentina. YPF benefits from a strong business position supported by its vertically integrated operations and dominant market presence in the Argentine hydrocarbons' market. Fitch anticipates that YPF will continue to exercise an active role in domestic fuel and gas supply. In the downstream segment, the company benefits from relatively high prices for refined products in Argentina, as domestic sales of refined products grew by 6% for the year allowing YPF to increase its market share of gasoline sales to nearly 58% (from 55% in 2013) and diesel sales to 60% (from 58%).

ADEQUATE CREDIT PROTECTION METRICS: YPF has relatively solid credit protection metrics, characterized by moderate leverage and a manageable debt amortization schedule. For the full-year 2014 period, total financial leverage, as measured by total debt-to-EBITDA, reached 1.2x, which is considered low for the assigned rating. YPF's total debt-to-total proved reserves ratio was solid at USD4.7 per boe.

Total cash and equivalents amounted to approximately USD1.1 billion as of Dec. 31, 2014, which is equivalent to 74% of short-term debt totalling USD1.5 billion. In the first quarter of 2015, the company's cash position was strengthened via international and domestic debt issuances totaling approximately USD600, meaning short-term debt is covered by more than 100% of YPF's cash position.

TARGET LEVERAGE OF 1.5x: Total debt as of the fourth quarter of 2014 amounted to approximately USD5.7 billion. EBITDA for 2014 was approximately USD4.9 billion, which is up 18% on a year-on-year basis, though Fitch is conservatively assuming flat EBITDA trends in 2015. During recent years, the company's leverage has been moderately increasing; mostly as a result of increases in debt to fund the company's ramped up capital expenditure program.

Fitch believes leverage could increase to the 1.5x - 2x level in the near to medium term given YPF's ambitious 2013-2017 USD28-USD30 billion capex program. This would put the company above its conservative long-term target of 1.5x, though these leverage levels are still considered moderate for the rating category. Incorporating the proposed bond issuance (conservatively assuming USD1.5 billion) and 1Q15 debt issuances (approximately USD 600 million), the company's December 2014 leverage ratio would rise to 1.6x on a pro forma basis.

RATING SENSITIVITIES

YPF's ratings could be negatively affected by a combination of the following: a downgrade of the Republic of Argentina's ratings; a significant deterioration of credit metrics; and/or the adoption of adverse public policies that can affect the company's business performance in any of its business segments.

A positive rating action in the short to medium term is considered unlikely given the linkage with sovereign credit quality, and Argentina's current sovereign restricted default rating.