Fitch Assigns a 'B' IDR to the Province of Santa Fe, Argentina; Outlook Stable

MEXICO CITY--()--Fitch Ratings has assigned the following ratings to the Province of Santa Fe, Argentina (Santa Fe):

--Long-Term Foreign Currency Issuer Default Rating (IDR) of 'B';

--Long-Term Local Currency IDR of 'B'.

The Rating Outlook is Stable.

KEY RATING DRIVERS

Santa Fe's rating reflects strong sustainability and leverage ratios, despite future plans that will significantly increase them. The rating also takes into consideration low refinancing risk relative to its annual budget, as well as positive, though limited, operating balances, underpinned by a solid and stable revenue system. Finally the rating considers Santa Fe's robust socioeconomic profile, as the third largest province in Argentina, in terms of Gross Geographic Product (GGP) and population.

In contrast, the rating is limited by the constrained fiscal and budgetary flexibility of the Province as well as its relatively weak liquidity position, which is mitigated by quite diverse liquidity sources. In addition, Santa Fe faces contingent liabilities related to unfunded pension and retirement obligations. On this matter, the Supreme Court recently ruled to cease the withholding of 15% of federal shared tax revenue to finance the National Social Security Administration (ANSES: Administracion Nacional de la Seguridad Social) and the devolution of all amounts improperly withheld since 2006, which will strengthen the Province's budgetary flexibility.

Considering the features of Argentina's institutional framework, Fitch does not believe any subnational entity to be rated higher than the sovereign, as the regional government's access to foreign currency is not deemed stronger than the central government's. Therefore, Santa Fe is rated at the same level as the sovereign.

Santa Fe is reliant on federal shared tax revenue (co-participation regime), a common feature in Argentinian provinces. Despite that, tax revenue (including federal taxes)-to operating revenue averaged 84.7% from 2011 to 2015, modifiable tax revenue represented a relatively low 36.3% of total tax revenue in the same period. This limits the province's fiscal flexibility and ability to control its own revenue sources, but at the same time endows the revenue system with stability and predictability through a foundation of broad-based national taxes. Santa Fe's dependence on discretionary transfers is also low, as current transfers received-to-operating revenue averaged 6% in the last five years. The province's operating revenue recorded a compound annual growth rate (CAGR) of 31.8% from 2011 to 2015.

Santa Fe's expenditure flexibility is low, as it has significant responsibilities that are operational in nature, such as the provision of health care and education. Salary and price adjustments and the deficit in Social Security have pressured operating expenditure in recent years. Moreover, due to the incorporation of all the employees into the provincial union, Santa Fe faces substantial obstacles in cutting the public labor force to reduce operating costs. Staff expenditure-to-operating expenditure averaged 57.4% from 2011 to 2015, constraining Santa Fe's ability to meet capital needs with its own resources.

While the high inflation environment presents a challenge to healthy fiscal performance, the Province reported positive but limited and declining operating balances during the period of analysis. Santa Fe's operating margin (operating balance/operating revenues) has been relatively stable, since expenditure growth (2011-2015 CAGR of 30.8%) has matched revenue growth. The operating margin closed 2015 at 4%, versus 5.3% in 2014 and 5.6% in 2013. Despite this decline, Santa Fe kept up an adequate budgetary performance in an election year (2015), when the dynamics of operating expenditure usually exceed operating revenue performance.

Capex-to-total expenditure has also been relatively low, averaging 8.5% from 2013 to 2015, although it improved to 9.8% in 2015, from 5.8% in 2012. This improvement was accompanied by the lowest deficit before net financing of ARS2.5 billion, or 3.7% of total revenue, which was funded by delaying payments to trade creditors, as Santa Fe does not have accumulated reserves. Floating debt reached 43.3 days of primary expenditure and 12.6% of operating revenue in 2015, after averaging around 34 and 9.6% from 2011 to 2014.

To finance major capital projects and tackle infrastructure lag, Santa Fe plans to issue notes for up to USD1 billion (or its equivalent in other currencies). The authorization bill, currently under discussion by the provincial legislature, states that the notes will accrue a fixed or floating interest rate in concordance with market conditions, while the maturity is expected to be between 5 and 12 years. Even though final terms are still pending, preliminary information suggests that principal may be paid in a single final bullet payment.

According to Fitch calculations, direct debt-to-current revenue will close 2016 at 17.2%, and will remain under 12.5% in 2017 and 2018, while direct debt servicing-to-operating balance will be around 35% between 2016 and 2018. Therefore, even though future capital projects will significantly increase debt burden ratios, Fitch believes Santa Fe's future debt profile will not be weakened for the next 2 to 3 years, as current debt levels are very low. Direct debt-to-current revenue has consistently declined over the last five years, closing 2015 at 3.15%, while payback (direct debt-to-current balance) was 0.8 years.

Regarding the composition of debt, almost 100% of the provincial debt will be denominated in foreign currency (tentatively USD). Nevertheless, if conditions for additional debt are favorable, Fitch believes that the currency risk faced by Santa Fe is manageable, due to the low leverage of the Province and to the relatively long maturity and low interest rates of its outstanding and expected debt.

Santa Fe has a relatively weak liquidity position, as cash represented less than 4.5% of total revenue in the last five years (2.6% in 2015). The Province can cover temporary deficits of the provincial treasury through the use of the fund balances of all jurisdictions and entities of the province's non-financial public sector without financial cost (Unified Fund of Official Accounts or FUCO, ARS3.7 billion in 2015). As another liquidity source, Santa Fe is authorized to issue short-term treasury notes for up to ARS2 billion or its equivalent in other currencies. Fitch considers the refinancing risk of Santa Fe as low, as the share of this financial tool in the annual budget is less than 3%.

Santa Fe did not transfer the pension and retirement fund to the national government, which is obliged to cover the underfunding of those pension funds that were not transferred to its coverage. The national government has not fulfilled the commitment of such financing since the homogenization of the pension funds that took place in 2006, so the Province has been obliged to handle the pension deficit through contributions. This deficit reached ARS1.9 billion in 2015, with a CAGR of 42.6% from 2011 to 2015.

In November 2015, the Supreme Court ruled to stop the withholding of 15% of the federal shared tax revenue to finance the National Social Security Administration. Santa Fe expects higher revenues of approximately ARS500 million per month. The ruling established a period of 120 days in which implement the terms and conditions of the devolution of all amounts improperly withheld since 2006, plus interest that may apply.

Fitch considers this situation as a credit positive for Santa Fe, as it will benefit its operating balance. According to Fitch calculations, the operating margin may improve to 6.9% in 2016, and then decline to 5.1% in 2017 and 3.2% in 2018.

Santa Fe is located in the Central Region of Argentina. The contribution of the Province's GGP in the national Gross Domestic Product (GDP) was 8.1% in 2013, the third largest nationally, while the GGP per capita represented 1.1x of the national GDP. According to the 2010 census, Santa Fe recorded 3.2 million residents, the third most populous Argentinian province, representing 8% of the country's population and reporting a CAGR of 0.7% versus the 2001 census, below the national population CAGR of 1.1%.

Even though Santa Fe's economy is strongly linked to the external sector and is dominated mainly by the servicing sector, Fitch considers it as relatively broad, diverse and stable, making it resilient to most external economic shocks, such as weaker commodity prices and continued underperformance in Brazil. The Province's exports represented 21.3% of national exports, emerging as the second Argentinian province in terms of export values.

RATING SENSITIVITIES

The IDR of Santa Fe should move in tandem with Argentina's sovereign ratings. An upgrade of the sovereign IDR, accompanied by an improvement in liquidity, fiscal and budgetary flexibility, could lead to an upgrade in Santa Fe's rating. A downgrade of Argentina's IDR, coupled with a sudden increase in the public debt burden and weak operating margins that significantly affect sustainability ratios, could lead to a negative rating action.

Additional information is available on www.fitchratings.com.

Applicable Criteria

International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878660

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Contacts

Fitch Ratings
Primary Analyst
Gerardo Carrillo
Senior Director
+52 55 5955 1600
Fitch Mexico, S.A. de C.V.
Manuel Avila Camacho Blvd. 88
Mexico, DF
or
Secondary Analyst
Alejandro Guerrero
Associate Director
+52 55 5955 1600
or
Committee Chairperson
Humberto Panti
Senior Director
+52 81 8399 9100
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Gerardo Carrillo
Senior Director
+52 55 5955 1600
Fitch Mexico, S.A. de C.V.
Manuel Avila Camacho Blvd. 88
Mexico, DF
or
Secondary Analyst
Alejandro Guerrero
Associate Director
+52 55 5955 1600
or
Committee Chairperson
Humberto Panti
Senior Director
+52 81 8399 9100
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com