Fitch Affirms Municipality of Medellin's IDR at 'BBB'

MONTERREY, Mexico--()--Fitch Ratings has affirmed the Colombian Municipality of Medellin (Medellin) national long-term rating at 'AAA(col)' with a Stable Outlook and the short-term rating at 'F1+(col)'. Fitch has also affirmed the Long-Term Issuer Default Rating (IDR) at 'BBB'. The Rating Outlook remains Negative. The Outlook reflects the Negative Outlook assigned to Colombia. A full list of rating actions follows at the end of this release.

The affirmation of the ratings reflects Medellin's importance in national context as well as its financial strength supported by a good financial administration; operating margins reversed the negative trend; the composition of debt in foreign currency and the currency exchange risk although showing manageable debt metrics, and the important financial support from Empresas Publicas de Medellin (EPM, Foreign and Local Currency IDRs 'BBB+').

KEY RATING DRIVERS

Debt and Other Long-Term Liabilities: Fitch considers Medellin's debt profile to be a strong rating factor with stable trend, reflecting still high debt-burden but manageable debt sustainability metrics. Medellin's debt of COP1.19 billion in 2015 represented 2.3 years of the state's current balance, lower than the median of entities rated in the 'BBB' category. Out of that figure, 67% of it is foreign debt, which still is not hedged to the exchange rate risk. As a counterbalancing effect, debt service to operating balance represented 18.7% as of the end of 2015.

As per the internal debt portion, a first program of bond for COP141,000 million notes will redeem at the end of 2016 which is already budgeted and does not represent liquidity pressures for the entity. The outstanding program for COP248,560 million in two series matures in 2024 and 2044. The administration has continued its efforts to reduce the risks exposure to the exchange rate although 2016 has not presented favourable market conditions.

As of September 2016 and according to Fitch's estimations solvency, sustainability and coverage of debt are under the limits established by the Ley 358 (Law 358). Such estimations adjust ratios to the influence of future budget allocations, a fiscal tool which enables the administration to execute the development plan in forthcoming budget years. Fitch believes that credit metrics are appropriate for the risk level assigned but monitors the effect of devaluation on the total debt level.

As per the economic factor, Fitch considers it to be strong with stable trend denoting the relative importance of the city to the national economy representing almost 7% of Colombian GDP. Its economy is mainly based on services and commerce although it still maintains a large number of industries important to the national and international trade. It sustains strong socioeconomic indicators with higher coverage of public services, education and health compared to National standards.

Fitch considers Medellin's financial performance to be a neutral rating factor and stable in the future. Although its operating margin had been diminishing in recent years, it reached 15.74% in 2015 from 12.72% in the previous year. This result reflects the entity's effort to reverse that trend. According to Medellin's Fiscal Framework and to Fitch estimations, operating margins may stabilize around the 15.5% figure.

On the other hand, management and governance is a strong rating factor with stable trend. Current administration is led by Mayor Federico Gutierrez, who was elected with no affiliation to any party but with a community movement who promoted his candidature. Fitch acknowledges the fiscal capacity of the administration to improve toll collections particularly now that this entrant government has implemented a new model for efficiently managing tax collection coupled with efforts to restrain operating expenditures.

Medellin benefits from the important dividends, both common and special, received from EPM permitting the municipality to be more flexible to allocate them to finance further capital expenditure. As a whole, dividends have represented around 20% of total income of the city since 2012.

RATING SENSITIVITIES
Medellin's ratings are capped by the Colombian sovereign. Any rating action affecting the Republic of Colombia, currently rated 'BBB'/Outlook Negative, will exert a direct influence over Medellin's ratings.

The Outlook of the long-term national rating is Stable. Nonetheless, a negative action might be taken if the direct debt increases to levels not compatible to those of its category. A direct debt to operating balance ratio higher than five years could exert a negative pressure on Medellin's ratings.

KEY ASSUMPTIONS
The ratings and Outlooks are sensitive to these assumptions:

--Fitch assumes a moderate level of operating expenditure leading to a 15% current balance figure to be present for the following five years;

--Fitch assumes the foreign debt participation in total debt remains at levels above the 65% and uses an exchange rate as stipulated by the local regulator which has a 22% security factor for the base case scenario giving some more space for volatility of foreign debt levels.

Fitch has affirmed the following ratings:

Municipality of Medellin:

--Long-Term Foreign Currency Issuer Default Rating (IDR) at 'BBB'; Outlook Negative;
--Long-Term Local Currency IDR at 'BBB'; Outlook Negative;
--National Rating at 'AAA (col)'; Outlook Stable;
--Short-term National Rating at 'F1+ (col)';
--COP141,000 million notes at 'AAA(col)';
--COP248,560 million notes at 'AAA(col).

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
Metodología de Calificaciones Nacionales (pub. 13 Dec 2013)
https://www.fitchratings.com/site/re/727099

Additional Disclosures
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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1015269
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015269
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https://www.fitchratings.com/regulatory

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Fitch Ratings
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+52-81-8399-9100
Fitch Mexico S.A. de C.V.
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Monterrey, N.L. Mexico
or
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Carlos Vicente Ramirez
Senior Director
+571 326-9999 ex. 1240
or
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Managing Director
+ 33 1 44 29 91 34
or
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elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Ileana Guajardo
Director
+52-81-8399-9100
Fitch Mexico S.A. de C.V.
Prol. Alfonso Reyes 2612
Monterrey, N.L. Mexico
or
Secondary Analyst
Carlos Vicente Ramirez
Senior Director
+571 326-9999 ex. 1240
or
Committee Chairperson
Christophe Parisot
Managing Director
+ 33 1 44 29 91 34
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com