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 September 14, 2015 - 12:06 PM EDT
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Fitch Assigns Province of Neuquen Proposed Bond 'CCC(EXP)' Expected Rating

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 year-end 2015.

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.

RATING SENSITIVITIES

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 the issuer.

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=990782

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990782

Endorsement Policy

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

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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
Fernando Mayorga
Managing Director
+34 93 328 8407
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com


Source: Business Wire (September 14, 2015 - 12:06 PM EDT)

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