Fitch Rates Municipality of Cordoba, Argentina's IDR 'B'; Rates Proposed Bond 'B(EXP)'

MONTERREY, Mexico--()--Fitch Ratings has assigned a 'B' rating to the Municipality of Cordoba's Long-Term Foreign- and Local-Currency Issuer-Default Ratings (IDR). The Rating Outlook is Stable. Fitch has also assigned an expected Long-Term Foreign-Currency Rating of 'B(EXP)' to the municipality's upcoming unsecured bond issuance.

The ratings are constrained by Argentina's Sovereign Rating.

The bond is rated at the same level as the municipality, considering the constraint of the Sovereign Rating. The bond will be issued in USD for an amount of up to USD150 million, to accrue a fixed interest rate to be determined at issuance and payable on a semi-annual basis. The estimated maturity of the bond is eight years, with equal capital balloon payments in the last three years. The notes will be a senior unsecured obligation of the Municipality of Cordoba.

The issuance is authorized under Ordinance No.12517. The proceeds will be used by the city to partially refinance debt and for public infrastructure projects.

KEY RATING DRIVERS

Cordoba's ratings consider the city's important economic position in the local and national context, its low level of debt, and its strong local revenue collection. In contrast, the high level of currency exposure and refinancing risks (characteristic of Argentine subnationals), its structural deficits and volatile operating margins, and the high level of payables in relation to the entity's liquidity position are the main weaknesses considered.

The municipality of Cordoba is the capital of the Province of Cordoba, and is the second most populated city in Argentina, and represents one of the most important social, educational, and economic centres. Cordoba has a diverse economic profile that encompasses automobile manufacturing, an important construction sector, and an IT cluster with more than 130 companies. Economic activity translates into a strong local revenue collection of taxes on commerce and industry, which represented 64% of operating revenues in 2015.

On the other hand, Argentine subnationals tend to have a high expenditure burden regarding public services and structural capital deficits in a context of macroeconomic challenges. In 2015 around 17% of total expenditures of the city were destined to public health (approximately ARS1.5 billion), while 11% were spent on education (ARS 900 million). The latter, coupled with an electoral year, inflationary pressures, and a higher staff expenditure (for capex execution), drew down Cordoba's operating margin in the past year.

However, financial performance could improve as information from the 1T of 2016 showed better margins than observed in 1T of 2015. The city is taking diverse actions to control operating expenses. Also, the municipality entered into a fiscal and tax ordering agreement with the province that addresses the funding of the education and health deficit. Fitch will monitor the evolution of this topic and its impact on the entity's budgetary performance.

In 2015 Cordoba's direct debt totalled ARS1.0 billion, representing a low level of 12.3% of operating revenues. The entity's direct debt is mainly composed by bond issuances and treasury bills. Direct debt servicing represented 2.9% of current revenues, but sustainability ratios were high because of the lower financial margins. Cordoba faces important maturities towards 2017; the municipality is seeking to re-profile debt and mitigate the entity's high refinancing risk.

Considering authorized new borrowing, debt levels would still remain low and around 26% of budgeted operating revenues for 2016. In 2015 around 30% of debt was denominated in foreign currency, but with prospective debt this would shift towards 75% increasing currency exposure. Still, Fitch believes that debt ratios would still be in line with Cordoba's credit profile.

About liquidity, Cordoba's level of floating debt (payables) is deemed high relative to the entity's liquid cash position. Payables are mainly liabilities with suppliers, employees, and others, and represented around 83 days of primary expenditure in 2015.

Finally, current management policies and practices are focalized towards administrative modernization and transparency, including the implementation of a single financial management system (as accounting norms date back to 1972). Also, the infrastructure development plan (2016 - 2019) is composed by an important portfolio of projects ranging from street lighting, to education, sewage, and other urban infrastructure developments.

RATING SENSITIVITIES

An upgrade of the sovereign rating accompanied by higher and sustained operating margins could lead to an upgrade of Cordoba's ratings.

The final rating of Cordoba's new bond is contingent upon the receipt of final documents conforming to information already received.

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/site/re/878660

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1011583

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011583

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Natalia Etienne
Analyst
+52 81 8399 9100
Fitch Mexico, S.A. de C.
Prol. Alfonso Reyes 2612
Monterrey, N.L. Mexico
or
Secondary Analyst
Humberto Panti
Senior Director
+52 81 8399 9100
or
Committee Chairperson
Christophe Parisot
Managing Director
+33 1 44 29 91 34
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Natalia Etienne
Analyst
+52 81 8399 9100
Fitch Mexico, S.A. de C.
Prol. Alfonso Reyes 2612
Monterrey, N.L. Mexico
or
Secondary Analyst
Humberto Panti
Senior Director
+52 81 8399 9100
or
Committee Chairperson
Christophe Parisot
Managing Director
+33 1 44 29 91 34
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com