Repsol could accelerate disposals opportunistically or to keep IG rating
* FFO leverage falling to 3x could be downgrade trigger
* Hybrid bonds possible if quickfire solution needed
* Indonesian assets eyed if Repsol opts for speedy sale
Repsol [BME:REP] could accelerate its disposal programme if it crosses interesting opportunities or its investment grade rating comes under threat, said a person familiar with and two bankers briefed on the situation.
Assuming announced sales close without any hitches, the Spanish oil company will have raised EUR 2.8bn from disposals, or 90% of its target of EUR 3.1bn for 2016-2018, said the person. This figure is also 45% of the company’s total disposal target of EUR 6.2bn by 2020.
If any rating agencies motioned towards cutting the Madrid-based company’s rating below investment grade, it would be likely to move quickly and aggressively, said the person and the bankers. Repsol’s three rating agencies confirmed its debt to be investment grade in March, although it is towards the lower end of the scale.
Standard & Poor’s (S&P) has Repsol’s short-term and long-term rating in the lowest category for investment grade, with A-3 and BBB-, respectively. Fitch Ratings has its short-term debt in the lowest category, with F-3, while its long-term debt is a notch higher at BBB. Moody’s places Repsol’s short-term debt at P-2, away from the floor, while its long-term debt is Baa2, just above its lowest category.
Triggers for a lower rating in the future include Repsol's adjusted funds from operations (FFO) leverage ratio slipping towards 3x, said a second person, briefed on Fitch’s rating. The agency is predicting this ratio to total 3.6x in 2016 and 3.3x in 2017, dipping below 3x in 2018. It was 4.4x in 2015. Another trigger would be an FFO fixed charge cover of 6x or below on a sustained basis, this person added.
No country exits are imminent, said the first person, adding that the company constantly evaluates a long pipeline of possible deals. The company is unlikely to make any substantive moves in the months ahead unless circumstances change, said the first banker.
If Repsol needed to make a quick move, it would consider a hybrid issuance, the first person said.
From its asset portfolio, Indonesian activities would jump to the top of the list of possible divestments if the group decided to move speedily, the first person added. Its minority stake in Tangguh LNG, a large liquefied natural gas (LNG) project, would be a likely candidate in this scenario, this person said.
The company hired Goldman Sachs to identify assets in Asia-Pacific, according to local press in November. A later report said Repsol’s 3.1% stake in Tangguh LNG could be worth around USD 300m (EUR 263m). If this price is confirmed, it would bring Repsol close to its 2018 disposal target.
Repsol also has stakes in 11 upstream blocks in Indonesia, as well as a joint venture with PT Sukabumi Trading to distribute lubricant oils. In October 2015, Repsol said it could exit countries or businesses with high levels of costs.
The Spanish oil major agreed to sell its liquefied petroleum gas (LPG) assets in Peru and Ecuador to Chilean company Abastible for USD 335m in April. The deal is expected to close in the months ahead. The sale of the LPG business was the company’s highest priority, this news service reported at the end of last year.
In February, the company agreed to sell its offshore wind power business in the UK to SDIC Power of China for EUR 238m. The assets were non-strategic, Repsol said at the time.
The underlying logic of the divestment programme, which is equivalent to 38% of Repsol’s market capitalization of EUR 16.3bn, is to focus on assets that are not linked to the oil price. The sales span downstream, midstream and upstream assets and are being designed to help the company improve its competitive position.
A spokesperson for Repsol declined to comment.