MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has affirmed its ratings on the City of Buenos Aires (the CBA) as follows:
--Long-term and local currency Issuer Default Rating (IDR) at 'B-', Outlook Negative;
--Short-term and local currency IDR at 'B'.
In addition, Fitch has affirmed the outstanding issues of the CBA. A full list of ratings follows at the end of this release.
KEY RATING DRIVERS
The affirmation of CBA's ratings considers its adequate fiscal and budgetary performance, generating sound operating margins over the last years despite the pressures on operating expenditures; it maintains high financial flexibility, adequate leverage and sustainability ratios; and it is Argentina's primary economic and financial center. The CBA's unfavorable debt structure, having 98.6% in foreign currency, as well as the sovereign rating; constrains the rating.
In 2013, an improvement was recorded in the operating margin (14.9% versus 11% in 2012), based on a very good income dynamics that surpassed the evolution of operational expenditure. Fitch estimates that by 2014 it will not be less than 10%, incorporating a more conservative scenario of the evolution of income and expenses, while according to the budget it will be 15.6%.
The city has a high financial flexibility. About 89.2% of total revenues are collected and administered locally. This shows a low reliance on federal transfers for the city's revenues and compares very favorably with the provincial average of 38.7%. However, the revenue structure is exposed to economic fluctuations.
Regarding debt, despite the considerable nominal debt increase in recent years, leverage and sustainability ratios are still very adequate, compared with peers. In 2013, the consolidated debt accounted for 24.7% of current revenues and 1.8x the current balance. Fitch expects the city's debt indicators will be adequate, even considering the authorized new debt and the use of the credit budgeted for 2014. In a conservative scenario, Fitch estimates debt will represent about 28.4% of the current revenues and 2.7x the current balance.
The main risk or limitations for CBA is the structure of debt. Despite CBA's low level of indebtedness, its debt structure is largely composed of debt in foreign currency (mainly U.S. dollars). This constitutes one of the major rating weaknesses due to the high exposure to the foreign exchange rate risk. In March 2014, foreign currency debt accounted for 98.6% compared to 97.7% in 2013. After the devaluation taken place in January 2014, most of the increase in debt registered in March compared to year-end 2013 was due to the peso's depreciation.
The CBA is the country's major economic and financial center. According to preliminary information, in 2013, the city's contribution to Argentina's GDP reached about 23.3% and was mainly driven by the real estate and commerce sectors. CBA's GDP per capita is three times the national average. Fitch does not expect significant changes in the city's production structure and its social and economic indicators.
CBA's Negative Outlook reflects a high correlation between the credit risk of subnationals and the sovereign. A country ceiling downgrade would lead to a negative rating action. Besides, a sharp deterioration in fiscal and financial indicators, along with an aggressive and unsustainable borrowing policy, might have an adverse effect on ratings.
Fitch affirms the following ratings for the CBA:
--Euro medium-term note programme (EMTN) up to USD2,290 million: long-term rating at 'B-';
--Series 7 for USD50 million: long-term rating at 'B-';
--Series 8 for USD475 million: long-term rating at 'B-';
--Series 10 for USD415 million: long-term rating at 'B-';
--Programme of Short-Term Treasury Bills up to ARP950 million: short-term rating at 'B'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', Aug. 14, 2012;
--'International Local and Regional Governments Rating Criteria Outside the United States', April 23, 2014.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
International Local and Regional Governments Rating Criteria - Outside the United States