OREANDA-NEWS. Fitch Ratings expects to assign a rating of 'CCC+'/'RR3' to YPF S.A.'s (YPF) proposed senior unsecured bond issuance of up to USD1 billion with a five-year bullet maturity. 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 and local currency Issuer Default Rating (IDR).

Fitch has assigned a country ceiling of 'CCC' to the Republic of Argentina, which limits the foreign currency rating of most Argentine corporates. 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 interference, economic uncertainty, and limited access to debt markets especially after the country's recent default.

Fitch expects to assign an 'RR3' Recovery Rating to the proposed issuance reflecting the expectation of a recovery in the range of 50% to 70% in the event of default. This expectation is due to YPF's' strong balance sheet and Fitch's belief that the company's default would be most likely driven by transfer and convertibility restrictions imposed upon the payment of foreign debt, not a material deterioration of the company's business or financial profile.

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 in April 2012. Since this action, the company's strategy and business decisions are governed by the Republic.

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 2015, YPF reported proved reserves of 1,226 million barrels of oil equivalent (boe) and average production of 577,000 boe per day (52% crude oil). Based on production trends, the company's reserve life is below-optimal at approximately six years. This 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.

STABLE PRODUCTION: As expected by Fitch, the company's production remained stable with an average production of 577,000 boe in 2015 (up 3% year-over-year). Given the company's ambitious capital expenditure program, Fitch expects the company to maintain stable production in 2016 and increase production in the following years. Production in the fourth quarter of 2015 (4Q15) averaged 582,800 boe per day, which is 13% higher than 4Q14 figures.

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, where YPF enjoys a 57% market share of domestic gasoline sales and approximately 59% of diesel sales, the company benefits from relatively high prices for refined products in Argentina.

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 2015, total financial leverage, as measured by total debt-to-EBITDA, reached 1.7x, which is considered low for the assigned rating. YPF's total debt-to-total proved reserves ratio was USD6.7 per boe.

TARGET LEVERAGE OF 1.5x: Total debt as of 4Q15 amounted to approximately USD8.2 billion. EBITDA for 2015 was approximately USD4.7 billion, which is down 4% on a year-on-year basis, though Fitch is conservatively assuming flat EBITDA trends in 2016. 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 1.8x-2.0x in the near- to medium-term given YPF's ambitious 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 of up to USD1 billion, the company's December 2015 leverage ratio would rise to 1.95x on a pro forma basis.

KEY ASSUMPTIONS
--Mid-single-digit production growth annually;
--Realized oil prices of USD61/bbl, with increased realized natural gas prices increasing to the USD4.5/MMcf level over the next five years;
--Low-single-digit revenue growth in dollar terms over the next five years;
--EBITDA of USD5 billion+ per year over the 2016-2019 period;
--Capex of USD4.7 billion for 2016 and USD6 billion per year during 2017-2019;
--Leverage in the 1.8x range over the next five years.

RATING SENSITIVITIES
Future developments that could, individually or collectively, lead to negative rating actions in the short term:
--Further economic deterioration and the Republic of Argentina's inability to convert and transfer foreign exchange for corporates;
-- Any further weakening of Argentina's fiscal accounts could have a negative impact on the companies' collections / cash flow
--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 could be the result of an upgrade of the sovereign rating.

LIQUIDITY
Total cash and equivalents amounted to approximately USD1.2 billion as of Dec. 31, 2015, which is equivalent to 55% of short-term debt totalling USD2.2 billion. Given the company is controlled by the Argentine government, Fitch does not anticipate any difficulties in accessing the local debt markets to refinance short-term debt.

FULL LIST OF RATING ACTIONS
Fitch currently rates YPF S.A. as follows:
--Foreign currency long-term IDR: 'CCC';
--Local currency long-term IDR: 'B'; Outlook Stable;
-Notes due 2018, 2024, 2025, 2028: 'CCC+'/'RR3'.