Potential YPF Default Poses Yet Another Headache For Repsol

A YPF bond due in July next year is likely to default, and while Repsol YPF SA should escape a similar fate, this prospect could be yet another headache for the Spanish company after YPF's operations were seized by Argentina's government last week. Analysts expect that YPF's nationalization will almost certainly lead to a default on its bonds. Argentina's proposal to take over 51% of YPF would cut Repsol' stake to just 6% from 57% currently. Repsol, which denounced the takeover, has vowed to take the dispute to court. Whether Repsol will have to fight bondholders as well remains uncertain, but at this point looks unlikely, according to analysts. The concern for Repsol stems from the legal structure of some of its EUR5.7 billion worth of bonds that allows investors to demand immediate payment should any of the company's subsidiaries fail to pay. In this case, YPF qualifies as such a subsidiary. In the document related to Repsol's debt issuance program, seen by Dow Jones Newswires, the so-called "cross-default" clause says that if "any Principal Subsidiary fails to pay," then Repsol bonds could also default. However, analysts are not outwardly concerned about this eventuality, pointing out court expenses would prove unpalatable, leaving Repsol most likely to cooperate with its bond holders. Richard Segal, credit strategist at Jefferies in London, said one option for Repsol would be to offer bondholders a "consent solicitation," which will allow the company to pay them a fee in order to eliminate the uncertainty before it even gets to court. The Spanish government said the YPF bond default is just another question mark facing Argentina. "Explain to me where the country is going to get the money (for a YPF bond) where there's a massive capital flight going on, there is a huge energy deficit and has a need for international funding," said Spanish Foreign Minister Jose Manuel Garcia-Margallo in an interview with Dow Jones Newswires. Still, analysts said Argentina's ability to tap its pension system for cash could also help cover any need for repayments. Read more. (Subscription required.)