DETERMINANTS OF CORPORATE RATINGS IN THE OIL INDUSTRY: THE REPSOL-YPF CASE

Abstract

The financing patterns of corporations have changed over the last fifteen years. Bond financing has superseded bank loans. In addition, the deeper integration of worldwide financial markets has diffused risk assessment mechanisms, which were previously restricted to industrialized countries. In this context, credit ratings issued by rating agencies such as Standard & Poor’s and Moody’s play an important role in the procurement of financing. A rating is referred to as “… an opinion about an issuer’s future capability, legal responsibility, and willingness to meet the payment of the principal and interest of a specific bond…” (Moody’s 1999a, p.5).This paper aims to verify whether or not it is possible to predict corporate ratings based on a set of financial indicators. We study the case of Repsol-YPF, a world-renowned Argentine oil company. The ordered logit model was used as estimation method, as it yields better results than the more commonly used least squares and probit models. From a small set of financial indicators, the most relevant appear to be earnings (EBITDA) and short term debt over total debt (STD/TD). This small number of financial indicators was able to reasonably predict Repsol-YPF corporate ratings, suggesting than ratings may not have information in addition to that publicly available.