MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has assigned a 'B' rating to the Province of Chaco'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 Province of Chaco's upcoming unsecured bond issuance.
The bond is rated at the same level as the province. The bond will be issued in USD for an amount of up to USD250 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 around seven to eight years, with equal bullet payments in the last years. The notes will be a senior unsecured, unsubordinated obligation of the Province of Chaco.
Provincial Law 7782 of 2016 authorized the issuance of this debt. Half the proceeds will be used by the province to cancel litigations and the rest to finance logistics and public infrastructure projects. The notes will be governed by the laws of the State of New York.
KEY RATING DRIVERS
Fitch has assigned an expected Long-Term Foreign-Currency Rating of 'B(EXP)' to the new bond, which is in line with the issuer's Long-Term rating ('B'/Outlook Stable). Chaco's rating mainly considers the province's low leverage ratios for the recent period, and adequate operating margins in the period 2011 - 2015. In contrast, the rating is limited by the constrained fiscal and budgetary flexibility of the province as well as its weak liquidity position. In addition, a tepid economy that is dependent on services is another limitation.
Chaco's long-term debt is manageable. In 2015, direct debt totalled ARS7.1 billion, representing 26% of current revenues and 5.4x operating balance. Exposure to currency risk is moderate at 39%, but will increase around 60% at the end of 2016 with new debt issue for USD250 million. Compared to other Provinces, Chaco does not have oil and gas assets, and therefore, no revenue denominated in dollars.
Considering new debt for 2016, leverage ratios will arise to 35% and the ratios of debt service will continue to be pressured given the current macroeconomic context, limited operating balances, and capital needs.
Liquidity has deteriorated but is still adequate for its rating category. Short-term debt has increased and may continue this trend in 2016. At year-end 2015, commercial debt rose to ARS2.8 billion from ARS0.8 billion in 2011. Cash deposits cover only 40% of commercial debt. However, this debt represents 33 days of primary expenditure, an adequate ratio.
Despite economic challenges in the local and national economy, Chaco's budgetary performance has been improving but remains limited. In 2015, operating margin was 6%. Fitch expects a similar performance in subsequent years.
Going forward, capital revenues for Chaco may increase because of the federal government's investment plan in the north of the country. Capex-to-total expenditure has also been significant and steady, averaging 17% in the 2011-2015 period, financed with federal resources and debt.
Fitch considers Chaco's economic profile weak. The most significant sector of the economy is services. The local government is one of the main employers. GDP per head is around USD 6,000 far below national GDP of USD14,400. However, Chaco's economy has grown more than national GDP and represents 1.3% of the national economy.
Fitch views the forthcoming Federal Law for deficit compensation in social security provincial schemes as a positive for the Province's public finances. Chaco did not transfer its pension fund to the federal government, hence, pension payments are covered from contributions from current employees; however, these are insufficient and the province will need to transfer extraordinary funds to the Social Security and Insurance Institute. The latent agreement may help to reduce future deficits in Chaco's institutes.
A recovery in fiscal and budgetary flexibility observed in operating margins, as well as an improvement of liquidity could lead to an upgrade in Chaco's rating. A sudden increase in the public debt burden and weak operating margins that significantly affect debt sustainability ratios, could lead to a negative rating action.
The final rating of Chaco's new bond is contingent upon the receipt of final documents conforming to information already received.
Date of Relevant Rating Committee: Aug. 2, 2016
Additional information is available on www.fitchratings.com
International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016)
Dodd-Frank Rating Information Disclosure Form