Monday, October 6, 2014

Argentina: Standard/Poor's Rates Cordobá CCC-Foreign, Local Currency, Outlook Negative

According to The Latin American Tribune, international ratings agency Standard and Poor's cap their long-term rating on the Argentine province of Cordobá at the same level as the transfer and convertibility (T and C) rating on Argentina. "The province continues to perform as our base-case scenario forecasted, amid uncertain external and internal funding. Therefore, it maintains its "weak" liquidity," says Standard and Poor's. 

"The negative outlook reflects the risks that Cordobá will continue to face given deteriorated economic conditions in Argentina, including potentially more restricted access to foreign currency after the recent sovereign default."

Standard and Poor's Ratings Services has affirmed its CCC- foreign and local currency ratings on the province of Cordobá. The outlook remains negative.

"We cap our long-term ratings on Cordobá at the same level as the CCC- T and C on Argentina (Foreign currency: SD/SD; local currency: CCC+/Negative/C), which reflects the likelihood that the sovereign will restrict non-sovereign entities' access to foreign exchange for debt service," says Standard and Poor's.

In our view, Cordobá fails to meet the criteria under which the foreign currency rating on a local or regional government (LRG) could be higher than the related T and C assessment."

Due to the cross-default clauses included in some of the province's debt obligations, we don't believe Cordobá has sufficient liquidity to meet all of its foreign and local currency debt obligations should a cross-default clause be activated, amid worsening macroeconomic conditions and limited financing options after Argentina's selective default on July 30, 2014. Therefore, we also cap the local currency rating on the province at CCC-.

Besides our T and C assessment on Argentina and Cordobá's cross-default clauses, a deteriorating macroeconomic environment, which further exacerbates Argentina's volatile and underfunded institutional framework, limits the rating on Cordobá. 

The central government has restricted Cordobá's access to funding, which has further stressed its already "weak" liquidity. Additionally, elevated inflation levels, which we expect to reach 40% by the end of 2014, will stress the province's expenditures further as it attempts to address state employee unions' inevitable demands for wage increases amid such high inflation. 

This will continue to limit Cordobá's very weak budgetary flexibility. High inflation and limited growth prospects, specifically a contraction in real GDP growth of 2%-2.5% in 2014 and 2015, will also hurt Cordobá's already weak economy and budgetary performance through narrower fiscal surpluses.

The significant economic contraction we expect this year and next will present continued challenges to Cordobá's weak financial management. José Manual de la Sota, the province's governor, has a strained relationship with the central 
government, mainly due to a disagreement over funding the province's pension system. 

We don't expect the conflict to be resolved in the near future. On the other hand, we expect Cordobá's moderate debt burden to continue to decline in relative terms over the next two years due to limited financing options and high inflation. However, the province's high contingent liabilities pose some risk to Cordobá's debt burden. 

We view the institutional framework in which Argentine local and regional governments operate as "volatile and underfunded." The assessment reflects our perception of Argentina's unpredictable and volatile intergovernmental system. 

Ongoing modifications to fiscal regulations and restrictions on LRG's access to foreign currency jeopardize its financial planning, and consequently, the province's credit quality. We also believe the system is increasingly vulnerable to political risk, resulting in revenue and expenditure uncertainties at the LRG level.

Our expectations for further macroeconomic deterioration at the national and provincial level, with high inflation over the next two years, economic contraction, further exchange rate depreciation, and increasingly limited financing options will continue to stress Cordobá's credit quality. 

Though revenues collected by the province have increased to 54% of total operating revenues in recent years due to tax hikes and more effective tax collection, the province will still have a hard time boosting own-source revenues as the tax burden is already high, in our view. 

We expect operating surplses of 4%-6% of operating revenues through 2016, down from 7% in 2013. And we expect capital expenditures to remain relatively stable at 7%-8% of total expenditures due to the province's commitment to complete long-term highway projects. Therefore, we expect small deficits after capital accounts --about 1% of total revenues over the next two years on average--which highlights the province's weak budgetary performance. Economic contraction is a key driver of our poor fiscal forecast.

Cordobá's weak economy is characterized by a relatively low GDP per capita of about $10,032 for 2013 compared with the national GDP per capita of $14,523, according to the local national statistical institute's (DGEyC) report. The province enjoys a diverse economy, with agriculture representing 14% of local GDP, industry (15%), trade (10%), real estate (18%), and all other sectors (43%).

However, we expect Cordobá's moderate debt burden to continue to decline in relative terms over the next two years, due to limited financing options and high inflation. By 2016, we expect Cordobá's total debt to represent 19% of operating revenues. However, the province is exposed to currency risk, given that 62% of its debt is denominated in foreign currency, and it faces risks stemming from the province's pension system. Additionally, we believe that its high contingent liabilities from its main government-related entities (GREs), EPEC and Banco de Cordobá, pose additional risks to Cordobá's debt burden.

Liquidity

Cordobá has a "weak" liquidity position, as defined by our criteria, with cash reserves covering only 60% of 2014 debt service. In December 2012, the federal government granted the province a grace period for principal and interest payments on debt owed to it until December 2013. However, in 2014, the central government, in response Cordobá's litigation against it regarding pension funding, added a clause that prevented Cordobá from extending this grace period. We estimate debt service in 2014 will be Argentine peso (ARP) 2.35 billion, compared with estimated net cash and liquid reserves of ARP$1.42 billion.

Cordobá's access to external liquidity is uncertain, in our view. According to Argentina's fiscal responsibility law, LRGs are required to obtain authorization from the federal government to issue new debt. However, due to the strained relationship between Cordobá and the central government, the latter withheld approval for new debt in 2014, and we don't expect approvals to be forthcoming. Therefore, Cordobá's external financing is restricted to already approved programs with multilateral entities.

Currently, Cordobá has a single bond, Boncor 2017, which it issued in two series. The first in 2009 for $150 million has required monthly payments since January 2010 and a portion of these payments is covered by co-participation funds. The province issued the second series in August 2010 for $400 million. Cordobá makes biannual interest payments on this series and will repay it in full in August 2017.


OUTLOOK

The negative outlook reflects the potential implications that further restrictions to foreign currency access could have on Cordobá's ability to continue to pay its debt service in a timely manner in a scenario of limited external financing due to the recent sovereign default. 

We could lower the ratings on the province if we perceived the central government might further tighten its exchange control regime, which could impair the province's ability to service foreign currency debt. On the other hand, we could raise our ratings if the risks of the sovereign's limited access to foreign currency diminish. 

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