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NEW YORK, Feb 9 (IFR) - As an oil company nationalized by a government that recently defaulted on its debt, Argentina's YPF was an unlikely candidate to come to a bond market still shaken by crumbling crude prices.
But the Triple C rated borrower did just that last week, becoming one of Latin America's first corporates to sell bonds abroad this year when it priced a US$500m dual-tranche tap.
The trade indicated that optimism over Argentina's political outlook - a market-friendly president is expected to win October's election - is starting to outweigh other concerns. This bodes well for the City of Buenos Aires, which kicked off roadshows on Friday ahead of a possible bond offering.
Yet the clear success of the YPF trade also raised some questions.
A four-day rally in crude prices had been buoying oil credits, but that abruptly faded on Wednesday - just when the company had planned to price. US crude fell below US$50 a barrel on the day, thanks to news of rising US supplies. Brent, meanwhile, slipped another 5% by early afternoon to US$55.26 a barrel.
With those prices falling further since, some wonder whether YPF can reach break-even at its marquee Vaca Muerte development - one of the world's largest shale oil fields.
"Clearly, the economics for Vaca Muerte are different at this point," said Jorge Piedrahita, CEO at broker Torino Capital.
A relatively modest US$1bn book size arguably underscored the uncertainty on the buyside, and left the deal falling short of the US$750m size initially telegraphed by ratings agencies.
Nevertheless, the fact that YPF could tap its bonds at levels relatively close to where they came early last year - when positive sentiment over policy changes in Argentina was at its peak - showed the oil outfit still has market access.
"The tone is worse now than when they did the deal [last year]," one senior banker told IFR. "It is a positive sign."
In the end, YPF tapped the 8.875% 2018s for a further US$175m, pricing the tap at 101.194 to yield 8.5%, essentially flat to guidance and initial price thoughts. It was a similar story for a US$325m tap of the 8.75% 2024s, which was priced at 98.833 to yield 8.95%.
"It's fascinating where you have an asset that has been nationalized being able to price at about 150bp or 200bp over Petrobras," said another banker, who spotted the Brazilian oil entity's 2024s trading on Wednesday at a yield of 7.4%.
YPF may have benefited from the turmoil at Petrobras, which has been embroiled in a corruption scandal, as oil-focused investors look to rotate out of the tainted credit into other plays in the sector.
"Investors are increasingly concerned with Petrobras falling off the index, and we have seen people getting out of Petrobras," said the banker. "YPF is in a better position credit-wise."
YPF enjoys leverage of just 1.1 times, and while Fitch expects that to increase to 1.5 times as it seeks to finance an up to US$30bn capex program between 2013 and 2017, debt dynamics certainly look better than those of investment-grade Petrobras, whose leverage ratios now stand at around five times.
New-issue premiums - which bankers put at 30bp-50bp - also probably inspired some buying of the YPF trade.
Accounts were thought to be driven by last year's stellar returns in Argentina, whose country component on the EMBI Global index tightened by 89bp versus a widening of 45bp for the index as a whole.
"If you have been underweight Argentina, it has been hurting you," said the senior banker. "YPF is more defensive."
Still, some participants say that YPF looks expensive in the context of other oil names or indeed more liquid sovereign bonds.
The Argentina government's Bonar 2024s, for example, were trading in the low 9% area last week, while US energy names such as SandRidge Energy's 8.75% 2020, rated B2/B-, have been trading in the mid 16% area.
"If you are looking to add Argentina risk, you would go for the Bonar 2024, because it is more liquid and it is essentially the same risk," said Torino's Piedrahita. "There is a price for liquidity."
A version of this story appears in the February 7 issue of IFR magazine. Reporting By Paul Kilby; Editing by Marc Carnegie and Matthew Davies