Fitch Affirms Province of Salta at 'CCC'

MONTERREY, Mexico--()--Fitch Ratings has affirmed the Province of Salta's (Salta) long-term foreign and local currency IDRs at 'CCC'. Fitch has also affirmed the long-term rating on Salta' USD185 million secured notes at 'CCC'.

The ratings are capped by Argentina's Country Ceiling, which Fitch last downgraded on July 31, 2014 to 'CCC'.

KEY RATING DRIVERS

Deterioration of Ability to Pay Debt Service: In 2014 debt service represented 70.5% of operating balance, which is still considered a favorable ratio by Fitch. However, this indicator is expected to increase due to the issuance of a new bond in the local market for ARS250 million in 2015. This bond corresponds to the first phase of the authorization of the Act 1207, which authorizes total debt for ARS650 million in the period 2015-2019 to be used on water and sewer projects. The evolution of this indicator depends not only on a prudent debt policy for the coming years but also on Salta's ability to maintain adequate operating margins.

Adequate Budgetary Discipline but Restricted Flexibility: Since 2010, operating margins have decreased due to the rise of operating expenditure caused by constant inflationary and wage pressures. Nevertheless, the operating income has maintained its adequate trend, so the operating margin has shown stability since 2012 (average 7.7% in the last three years). Fitch estimates that by 2015 this ratio could narrow, as shown in the first quarter of 2015.

Low Debt: Salta's direct debt in 2014 totalled ARS3.7 billion, representing 21.8% of current revenues and 3.4x current balance, far below national medians (38.7% and 4.4x). Even though 49.7% of Salta's direct debt is nominated in foreign currency the exchange risk is mitigated because the province has part of its own revenues (royalties) linked to the USD. Considering the new debt, as well as the expected lower operating margins, leverage indicator may deteriorate in the next years but will still compare favourably with the national medians.

Granted Bonus Royalties: Fitch estimates that oil and gas royalties may be insufficient to repay some specific debt services; because of that as well as the country ceiling, the bond has the same rating as the Province. Actually, after the last payment date (March 16, 2015) the trigger of royalties' coverage was activated, which means it is not releasing any surplus to Salta.

RATING SENSITIVITIES

A downgrade of Argentina's Country Ceiling would result in a downgrade of the Province of Salta's ratings. Any change of the Salta's rating could impact on the bond rating in the same direction. If there is an improvement in the Argentine hydrocarbon market conditions, Fitch will revise its potential positive impact on the bond rating, albeit constrained by the Country Ceiling.

Additional information is available on www.fitchratings.com

Applicable Criteria

International Local and Regional Governments Rating Criteria (pub. 18 May 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865254

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=987566

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987566

Endorsement Policy

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

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Contacts

Fitch Ratings
Primary Analyst
Martha Gonzalez
Associate Director
+52 81 83999132
Fitch Mexico S.A. de C.V.
Prol. Alfonso Reyes 2612
Monterrey, N.L.
or
Secondary Analyst
Humberto Panti
Senior Director
+52 81 83999152
or
Committee Chairperson
Gerardo Carrillo
Senior Director
+52 55 5955 1600
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Martha Gonzalez
Associate Director
+52 81 83999132
Fitch Mexico S.A. de C.V.
Prol. Alfonso Reyes 2612
Monterrey, N.L.
or
Secondary Analyst
Humberto Panti
Senior Director
+52 81 83999152
or
Committee Chairperson
Gerardo Carrillo
Senior Director
+52 55 5955 1600
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com