It's hard to make a bad reputation worse

Argentina's bullying tactics on YPF are not going to win it any friends, particularly in Spain. But with little foreign investment to be withdrawn and already low expectations among emerging market investors, the longer term impact is likely to be limited.

  • 17 Apr 2012
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The radical re-nationalisation of oil company YPF announced this week by Argentinian president Cristina Kirchner, whereby the state will take ownership of a 51% stake in the company from Repsol, the Spanish oil giant that owns 57.4%, has sparked international outcry.

Given its deviation from the norms of international trade, this is unsurprising. Yet another interminable arbitration dispute is no doubt in the offing. But once the initial broader market jitters have settled, those specialist investors already used to such shenanigans are unlikely to be too rattled. The country’s credit probably won’t see much damage in the long term either.

For now, though, the uncertainty has knocked prices across the three affected issuers’ shares and bonds. YPF stock was down 11% on Monday, the YPF 2028s were down three points, Repsol stock was down 6% today, Repsol bonds have been hit by five points — and Argentina CDS widened 50bp yesterday and a further 25bp today.

Repsol reckons its stake is worth about $10.5bn, but it is unknown how much Argentina will offer. Nor is it known how YPF’s bondholders will be compensated — if at all — for the change in ownership, although the outstanding YPF $70m and $100m bonds do have change of control puts, with specific expropriation clauses. That makes it likely that bondholders will have little cause to complain — either they will be paid out in full, at a price higher than the bonds were trading in the secondary market, or if they remain outstanding, the bonds are likely to trade up anyway as Argentina is a stronger owner than Repsol.

But what of the effect on Argentina? This is likely to be limited. Since its 2001 sovereign default, Argentina has been punished. Even before this latest scandal, its five year CDS was trading around 900bp, 150bp wider than Venezuela. Venezuela, let us not forget, is a country that investors regularly criticise for its poor interest rate and foreign exchange policy, high unemployment, refusal to raise gas prices for its population, not to mention the Chavez administration’s long list of oil company and property asset appropriations that numerous multinationals have spent years struggling with.

Argentina’s yields are already sky high. The country’s reputation post-default is so bad with investors that some think this latest tussle is priced in. As for sparking a withdrawal of foreign investment, well, there has been precious little of that since 2001.

While the situation with YPF might well turn some off investing in the country in the future, the market will struggle to punish it more than it already has been.

Other Spanish corporates that have been relying more and more on their Latin American operations to help bolster domestic franchises that are exposed to a flagging economy might well be tempted to take fright. But oil is different. There is probably little reason to assume a similar move across other industries.

For any investors already in two minds as to whether to contemplate future investment in the country, this episode might well be enough to turn them off for good. In the view of Mexican president Felipe Calderón, “no one in their right mind would invest in a country that expropriates investments”.

But he is wrong. Yes, market prices have taken a knock. But over the longer term, emerging market investors are a hardy lot. And there is much recent evidence of resource nationalism and nationalisation — from Australia to Kazakhstan to Zambia. While it is unwelcome, smart investors never rule it out in an emerging market. The covenant in the YPF bonds makes that abundantly clear.

It is a shame that Argentina has blotted its copybook once more, but it is barely noticeable on a page of ink stains. For many EM investors, this will simply be another international dispute to add to the list.

  • 17 Apr 2012

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1 Bank of America Merrill Lynch (BAML) 7,026 25 11.95
2 Citi 6,449 21 10.96
3 BNP Paribas 5,093 18 8.66
4 Barclays 4,040 11 6.87
5 Lloyds Bank 3,615 14 6.15

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3 Wells Fargo Securities 88,155.55 263 9.51%
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5 Credit Suisse 51,260.05 154 5.53%