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Derivatives

Repsol Spreads Widen On Argentine Default Fears

Credit default spreads on Spanish oil and gas giant Repsol YPF widened last week amid concerns that a potential sovereign default by heavily indebted Argentina could have a negative impact on Repsol's Argentine assets. Five-year protection on Repsol widened about 30 basis points to 130-140bps on Wednesday from 100-110bps the week before, according to London-based traders. "Some of the Spanish names are wider and Repsol in particular because it has the largest exposure to Argentina," summed up one trader. Repsol purchased the Argentine oil and gas company YPF in 1999. Five-year protection on banks also gapped out. Banco Santander Central Hispano was quoted about 10bps wider at 42-52bps Wednesday.

Robert Pozzi, a credit analyst at Commerzbank Securities in London, said the fundamentals of Repsol remain largely unchanged and that the selloff is too severe. Although he said Repsol is dependent on Argentine oil and gas sales from YPF, he noted these have continued to grow during the last three years despite Argentina's recession. And a devaluation, he argued, would give a boost to the economy. "Demand is not going to catastrophically come down, people are still going to buy basic services like these," he said. However, Pozzi acknowledged Repsol is vulnerable to counterparty risk, since it sells its products through regional distributors.

Repsol is rated A minus by Standard & Poor's and A3 by Moody's Investors Service.

Credit

Five-Year Credit Protection On Repsol

Source: J.P. Morgan Chase

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