Fitch Ratings has assigned the Province of Neuquen (Neuquen) a long-term
foreign and local currency Issuer Default Rating of 'CCC' and an
expected foreign currency long-term rating of 'CCC(exp)' to Neuquen's
forthcoming bond. The ratings of Neuquen and the expected ratings of the
bond are at the same level as the sovereign ceiling for Argentina.
The bond will be issued for up to USD350 million and will be denominated
in U.S. dollars. It will accrue a fixed interest rate according to
market conditions and payable on a quarterly basis. The maturity is
expected to be 12 years, with a grace period of four years. The Province
shall make a fiduciary assignment to the Argentine Collateral Agent of
100% of the royalties and extraordinary canons of gas production,
payable to the Province by the Dedicated Concessionaires. According to
Fitch calculations, the expected gas royalties and extraordinary canons
affected for the bond's debt payment would provide adequate debt
coverages, even in a conservative scenario.
Pursuant to Provincial Law No. 2952, which authorized the issuance of
the notes, the Province will use the net proceeds of the notes after
deducting commissions, fees and expenses payable by the province to make
amortization payments of certain public indebtedness of the province
maturing on or after Jan. 1, 2015. The Indenture and the notes will be
governed by the laws of the State of New York.
The events of default include: Failure to pay debt service for a period
of 15 days, debt service reserve account not fully funded in accordance
with the schedule, default of the provincial general government debt,
royalties' coverage below 1.25, among others.
KEY RATING DRIVERS
Neuquen has a short medium term maturity debt profile, with a constant
need of refinancing. However, following the bond issue, the province is
expected to increase the average life of the debt to 7.5 years from the
present 3.6 years.
The province expects a greater deterioration in its operating balance
due to a higher growth in operating expenses that is not being
accompanied by an increase of revenue. This determines important
financial needs which are estimated at approximately ARS1.7 billion
through year-end, having an increased refinancing risk. The proceeds of
the new bond, as well as the authorization of debt exchange, will
alleviate liquidity pressure.
Fiscal performance has been satisfactory but it is expected to
deteriorate given the reduced price of oil, which will lead to lower
expected royalties, and the recent sharp increases in operating
expenditure in personnel costs in excess of the inflation ratio. Neuquen
recorded very volatile and on average, weak operating margins in the
period 2010-2014. During 2014, the province registered a significant
improvement in its operating performance relative to 2013 (10% versus
4.3%), Fitch expects operating margins to turn negative in 2015 (to
-1.1%) but pick up again to a positive 0.2% in 2017. The consolidation
of future positive operating balances will depend on Neuquen's
expenditure control. Operating margins in the first semester of 2015
registered a significant deterioration compared with the same period of
2014 (-1.8% vs. 18.7%). The negative trend is expected to remain at
Neuquen is characterized by having a fiscal autonomy above average which
is a positive ratings factor. It has a significant percentage of own
revenues in total operating revenue (70.8% in 2014 versus 41% for the
all the Argentinian provinces excluding the City of Buenos Aires). This
is explained by a higher share of provincial tax on gross income and
income of hydrocarbon royalty which are imposed on oil and gas
production. However, the province is also limited due to its great
economic concentration, and also because the oil and gas sectors are
highly regulated by the national government in Argentina.
Given the importance of the hydrocarbon sector in Neuquen, the recent
change to its policy nationwide, which results in a positive expectation
of the sector, puts the province in a very good position to strengthen
its regional economy and thus have a positive impact in provincial
finances in the medium term.
A change in the sovereign ceiling could result in a change in the same
direction in the province's ratings.
The final rating of Neuquen's new bond is contingent upon the receipt of
final documents conforming to information already received. A rating
action on the bond would be triggered in the event of a rating action on
Additional information is available on www.fitchratings.com.
International Local and Regional Governments Rating Criteria (pub. 18
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
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