Fixed Income Analysis /

YPF: Supplier contracts ‘peso-fied’ in response to oil price freeze; reiterate Hold

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    28 August 2019
    Published byTellimer Research

    Argentina’s largest energy company, YPF S.A. (bonds ticker: YPFDAR), is ‘peso-fying’ its hard currency-denominated contracts with suppliers, at a USD/ARS exchange rate of 45.19, in light of the government freezing crude oil prices for (at least) 90 days. The price freeze is set to cost the company cUS$120mn a month, according to CEO Daniel González.

    In an Econojournal article, the company is quoted as saying that:

    “The effects of the strong and sudden devaluation, the temporary freezing of the sales price of fuels, the need to maintain the supply, and the restrictions in the gas market, expose the company to the risk of generating a de-coupling between its revenues and its expenses. YPF will make all efforts to limit the impact generated by this situation, adjusting its supply chain to this reality, prioritizing the continuity of essential projects for the growth of the company with a focus on the preservation of operations, safety, and employment.”

    Tariffs set by contractors are denominated in Argentine pesos, but their costs are linked to the US dollar and are updated in accordance with the official exchange rate. Starting immediately, YPF will demand that those ‘dollarised’ costs be quoted in pesos, at an exchange rate of 45.19 pesos per dollar, even though ARS currently trades at c56 pesos per dollar.

    This will apply to purchases of inputs that YPF has made in the past that it has not yet paid for, as well as future purchases.

    YPF added that: “As long as these restrictions remain, the company will amend its goods and services contracts in accordance to the new scenario generated by the freezing of prices.” According to the Econojournal article, most of the supplier contracts have a “trigger clause” that states that when the peso devalues by more than 3% or 6%, depending on the case, contracts can be reviewed.

    We reiterate our Hold recommendation on the YPFDAR family of bonds, for three main reasons: 

    • YPF has never defaulted and is being proactive in announcing cost cuts to match the projected decline in revenue; 
    • At current prices, we believe the yields YPFDAR bonds offer remain fair, despite the oil price freeze, but we see potential for further short-term risks before, and possibly after, the 27 October general election.
    • Q3 is likely to be a weak quarter given these measures and their effect on revenues, heightening concerns about the company’s performance and the risk of further adverse measures.