Rating Action: Moody's changes the outlooks to negative from stable on the ratings of Bogota and Medellin; ratings affirmed
Global Credit Research - 04 Dec 2020
New York, December 04, 2020 -- Moody's Investors Service, ("Moody's") has today changed the outlooks to negative from stable and affirmed the Baa2 long-term issuer (Global Scale, local currency) and senior unsecured debt ratings (Global Scale, foreign currency) of Bogota, Distrito Capital (Colombia) and the Baa2 long-term issuer ratings (Global scale, local and foreign currency) of the City of Medellin. The baseline credit assessments (BCA) for both cities were also affirmed at baa2.
Today's action was prompted by Moody's affirmation of the Government of Colombia's Baa2 rating and the revision of its outlook to negative from stable. For full details please refer to the sovereign press release. (https://www.moodys.com/research/--PR_435668)
RATIONALE FOR THE NEGATIVE OUTLOOKS
The change in the outlooks to negative from stable for Bogota and Medellin reflects the change in the outlook on Colombia's sovereign rating (Baa2 negative), taking into account the strong economic and operational links that these cities have with the central government and the close oversight that Colombia's central government exerts over the country's regional and local governments.
RATIONALE FOR THE AFFIRMATION OF THE RATINGS
The affirmation of the baa2 baseline credit assessment (BCA) and Baa2 ratings of Bogota and Medellin reflects their economic strength, which supports their high levels of own-source revenues, as well as their solid governance and management practices. As Colombia's two largest cities, each benefit from a diversified local economy, and both have historically maintained moderate debt levels and manageable cash financing requirements that have been driven primarily by infrastructure spending.
Between 2015-2019, Bogota's cash financing requirements averaged -7.0% of total revenues, while net direct and indirect debt averaged 11.3% of total revenues. Moody's estimates that Bogotá's cash financing requirements will be around 7.9% of total revenues in 2020, taking into account the impacts of the coronavirus pandemic, the economic contraction in Colombia and the city's ongoing infrastructure spending. Bogota is presently undertaking an ambitious capital programme that will lead to an increase in debt, however, Moody's expects that debt levels will remain moderate as capital expenditures have historically not increased as quickly as anticipated. Debt is projected to equal approximately 23.3% of total revenues in 2020, a manageable level for Bogota.
Medellin's cash financing requirements over the 2015-2019 period averaged -3.9% of total revenues and debt levels averaged 29.9% of total revenues. Moody's estimates that Medellin's financing deficits, given the weakening of the economy and the effects of the pandemic, will be around 5.3% in 2020 and weaken to 8.1% in 2021, which we expect will be partially funded through debt . As a result, debt levels will increase to around 35-40% in 2020 and 2021, the highest levels recorded in the last five years, though a level that Moody's considers to be manageable. Medellin will also continue to support its economy through significant infrastructure spending, but Moody's expects that debt levels will remain moderate.
The ratings also incorporate an expectation of a strong likelihood of receiving extraordinary support from the Government of Colombia in the event that the cities faced acute liquidity stress.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
In Moody's assessment, environmental and social considerations are not material to Bogota and Medellin's ratings. Governance considerations are material to Bogota and Medellin's ratings. Both cities comply with national rules and regulations and publish financial statements on a clear, complete and timely basis. Additionally, both have strong debt management robust auditing bodies.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the negative outlook, an upgrade in the ratings of Bogota in the near term is unlikely. However, the outlook could be stabilized if the sovereign rating is stabilized. Conversely, a downgrade of Colombia's Baa2 rating or a material increase in the city's cash financing deficits leading to a higher-than-expected increase in debt levels and/or a sharp deterioration in liquidity metrics could exert downward pressure on the ratings.
Given the negative outlook, an upgrade to Medellin's rating is unlikely in the near term. However, the outlook could be stabilized if the sovereign rating is stabilized. Conversely, a downgrade to Colombia's Baa2 rating or higher-than-expected cash financing deficits, leading to high debt levels, or a further deterioration in liquidity metrics could exert downward pressure on the ratings.
The principal methodology used in these ratings was Regional and Local Governments published in January 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1091595. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
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