In a time of crisis, even the strongest of companies in Argentina is posing a threat to investors and corporations across the globe, as is the case with Argentina's oil and gas company YPF, a subsidiary of Spain-based Repsol-YPF.

YPF holds the strongest credit in Argentina, hands down, sources say; however, it has not gone without feeling the imposition of the Argentine government. It has suffered the effects of the devaluation of the peso and felt the pressure of the newly imposed 20% tax on exports.

And, a cross-default clause that applies to the company's unsecured debt is causing some concern for the parent company, Spain's Repsol. The clause states that if Repsol or any of its subsidiaries were to default on more than $20 million of its debt obligations, bondholders have the right to collect their bonds in advance. Standard & Poor's said it believes Repsol has an incentive and the financial means to support YPF.

However, Repsol has not stated that it will necessarily support YPF in the case of direct intervention by the Argentine government, and therefore, S&P will maintain a significant differential between the ratings on Repsol and YPF. Repsol is currently rated BBB/A-3/negative outlook, five notches above YPF's foreign currency rating, which is B+/CreditWatch Negative. YPF's local currency is rated BB+/negative outlook.

S&P believes that Repsol is the only Europe-based issuer that may possibly be affected by a cross-default clause on an Argentina-based principal subsidiary. "YPF is still in reasonable shape based on the likely cash-flow relative to its debt," said Laura Feinland Katz, an analyst with S&P. However, Feinland Katz added, "The risk of sovereign intervention with YPF is significant enough to put YPF's rating into speculative-grade."

If Eurobond investors choose to accelerate the related debt, Repsol's liquidity would be squeezed, making it incompatible with current ratings, S&P said. However, the rating agency considers it unlikely that investors would choose to accelerate the related debt, given Repsol's strong Spanish franchise and uncertainties about pursuing the matter through Spanish jurisdiction as a result of the limited creditor-friendliness of Spain's bankruptcy system.

YPF currently has very manageable debt-servicing requirements and provided the government does not impose further severe exchange controls, the company is expected to service its debt without support from Repsol. YPF currently has three export receivable transactions backed by the future cash flows based on the purchase of oil. S&P currently has the three deals rated BB+' with a negative outlook. The Argentine company also has two additional existing wrapped deals, Oil Enterprise Limited and Oil Trading Corp., both rated AAA' by S&P.

Repsol acquired YPF in 1999 in an effort to achieve multinational dimensions. Repsol-YPF has become Spain's largest company in terms of revenues, the largest private energy company in Latin America in terms of total assets, and one of the world's ten largest oil companies on the basis of stock capitalization and proved reserves.

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