Sunday, 23 September 2018

YPF runs with bulls

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Emerging Markets

Growing optimism over policy changes prepares ground for oil company issue

YPF bonds may trade excessively tight to a sovereign still in the throes of a legal battle with holdout creditors, but the recently renationalised oil company is likely to benefit from renewed bullishness towards Argentina as it prepares to return to market with a bond offering of up to US$1bn.

A series of market-friendly moves have the buyside and Wall Street banks excited about a possible turnround story in Argentina following the presidential elections in 2015 and as a result asset prices have clawed back many of the losses incurred in the wake of a peso-devaluation in late January.  

Despite the unlikely prospects of enjoying an electoral victory next year, the current administration has changed tack and embarked on more orthodox economic policies as it seeks to staunch US dollar outflows and regain access to an international market that has been closed to it since the country defaulted in 2001.

“The Kirchner administration has shown a willingness to leave a better scenario for the next government,” said a banker who closely follows the country.

A sufficient number of investors appear to have bought the story, shrugging off last week’s Moody’s sovereign downgrade to Caa1 after it warned that dwindling reserve levels heightened default risks.

The tone at rating agencies contrasts with Wall Street firms such as Bank of America Merrill Lynch, which moved this month to lift the country’s sovereign debt to overweight from market weight, citing the government’s increasingly market-friendly stance.

Bankers are betting that YPF and other provincial issuers will find a welcome audience among certain buyside accounts hoping to benefit from upside potential.

YPF had hoped to issue in January after its board approved the sale of up to US$1.2bn in bonds. But peso devaluation and the broader emerging market rout waylaid the transaction.

Since then, numbers have gone stale and the borrower has been waiting to update its documents to include full-year earnings, but could in theory pull the trigger on a deal as early as this month or in April.

“They are still in blackout period, but it is a company that can move overnight if they thought the opportunity was there,” said another banker involved.

“YPF is Argentina without attachment risks”

Morgan Stanley and Itau led YPF’s first market-driven transaction in more than a decade late last year, when it priced a new 8.875% five-year issue at 99.505 to yield 9% after books grew to more than US$2bn. It is thought that those banks are also likely winners for the forthcoming bond.

Those bonds nose-dived in January to 97.00–98.50, but have since recovered to around 102.875–103.75 or 8.12%–7.90% on a yield basis. It is a similar story for sovereign bonds, which have rallied by about six points – with Bonar 2015s and Bonar 2017s trading on Thursday at 97.00–97.25 (11.66%–11.47%) and 85.65–85.80 (14.25%–14.08%), respectively.

Sovereign upside

That the state-owned YPF is trading some 600bp inside the sovereign may make little sense at this stage, but secondary levels will clearly work in its favour and please the sovereign, which is unable to access the market at those levels and wants to get its hands on vital dollar reserves.  

“YPF is Argentina without attachment risks,” said a hedge fund manager, who argued that yields on the oil company were where the sovereign should trade once it finally settles with holdout creditors.

From that perspective, there is more upside to buying sovereign debt than YPF, which at 8% arguably provides little downside protection should risks escalate, he noted.

For now, momentum is certainly behind sovereign debt. The recent reopening of negotiations with the Paris Club was seen as another sign that the country is making efforts to normalise relations with external market creditors.

“With a few changes Argentina could look substantially better than now,” said the hedge fund manager. “The economy is not as damaged as Venezuela’s and there is no leverage at the consumer or corporate level. From that standpoint, Argentina could go from being a basket case to one of the [market’s] darlings.”

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