MONTERREY, Mexico--()--Fitch Ratings has affirmed the Municipality of Medellin's ratings as follows:
--Long-term foreign currency (FC) at 'BBB-';
--Long-term local currency (LC) at 'BBB';
The Rating Outlook is revised to Positive from Stable.
KEY RATING DRIVERS
In Fitch's opinion the ratings of Medellin are capped by Colombia's sovereign risk. The Outlook revision on Medellin's ratings is the result of the same action taken by Fitch on the Colombia's Sovereign rating on March 6, 2013.
Medellin's ongoing credit strengths include:
--The city's relevant role in the Colombian economy;
--The municipality's sound fiscal and financial policies which have allowed maintenance of high operating margins and significant cash flow;
--The important financial support of common dividends transferred from Empresas Publicas de Medellin (EPM), which helps financing major investments.
Nonetheless, the ratings also incorporate the political risk associated with the public sector; a prospective debt-burden that although manageable is much higher than historical levels; and low coverage of pension liabilities, which has been financed according to Colombian Law.
Medellin is the second largest economy nationwide with a strong industrial influence, accounting for about 8% of Colombian GDP. It has strong socio-economic indicators, which are reflected in public services coverage of close to 100%. Fitch expects that the significant level of investment in infrastructure helps to maintain sustained economic growth in the medium term.
The quality management has ensured an outstanding fiscal and financial performance with robust and dynamic fiscal revenues and relative controlled operational expenditure, which explains the high operating margins and favorable liquidity levels. Fitch doesn't expect important changes in municipal management at this time.
Through its development plan, 'Medellin un hogar para la vida', the current administration plans to implement important infrastructure projects. Its financing strategy is based on higher tax revenues and transfers and will also consider accessing additional credit resources. Fitch will monitor the development of these projects and the financing plan, which is not expected to press the entity's financial flexibility due to the prudent financial policy that Medellin has followed.
Medellin registered COP$511,419 million (US$281.3 million) of debt as of Dec. 31, 2012, concentrating 54% of it in foreign debt. In 2012, interest payment over operating surplus as well as total debt-to-current revenues ratios stayed lower than the 40% an 80% limit established in the terms of Colombian Law 358. Moreover, considering the composition of debt and the payment of ordinary bonds in 2016, the administration is currently considering measures to reduce the risks (exposure to the exchange rate, variable rate and concentration of amortization capital). Fitch will monitor these measures as they are revealed and implemented.
The 100% participation in the EPM represents credit strength to Medellin due to the important amount of common and special dividends transferred to Medellin from the entity, which are of free disposition, increasing its financial flexibility. Fitch will monitor the different investment plans of the company and its potential impact on the payment capacity of Medellin.
Pension liabilities could represent a contingency in the long-term. The pension liabilities have been financed according to Law 549 from 1999, with coverage close to 20%.
Positive: An upgrade of the Sovereign rating, accompanied by Medellin's solid operating performance, could trigger a positive rating action.
Negative: The current Rating Outlook is Positive. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a material likelihood, of leading to a rating downgrade. However, future developments that may, individually or collectively, lead to a stabilization of the Outlook include:
--Stabilization of Colombia's sovereign rating;
--Significant debt increase (short-term and/or long-term);
--An important deterioration in its operating margins;
--Deterioration of cash levels.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Tax Supported Rating Criteria' dated Aug. 14, 2012;
--'International Local and Regional Governments Rating Criteria, Outside the United States', dated Aug. 17, 2012.
Applicable Criteria and Related Research
Tax-Supported Rating Criteria
International Local and Regional Governments Rating Criteria - Outside the United States