Rating Action: Moody's affirms Province of Chubut issuer and debt ratings and revises outlook to stable
Global Credit Research - 11 Jan 2021
New York, January 11, 2021 -- Moody's Investors Service, ("Moody's") affirmed today the Ca issuer and senior secured debt ratings of the Province of Chubut. The baseline credit assessment is affirmed at ca. At the same time, the outlook has been changed to stable from negative following the restructuring of Chubut's $650 million notes.
On 16 December, the province of Chubut announced that it had reached the necessary consent to modify the terms of its notes due 2026. The agreement reached with bondholders entails a maturity extension to 2030 and a change in the coupon rate from a fixed 7.75% to a step-up schedule that starts at 7.24% until October 2021 and rises to 7.75% thereafter.
The affirmation of the ca baseline credit assessment and Ca issuer and debt ratings acknowledges the perennial idiosyncratic risks of the Province of Chubut, such as a track record of weak operating and financial results, tight liquidity, inflexible expenditure and high leverage. Since 2015, the Province of Chubut's financial performance has significantly deteriorated, mainly because of a very sharp rise in current expenses. In 2019, for instance, the province posted a gross operating deficit of 4.0% of current revenue, and a cash financing deficit of 11.5% total revenue, mainly caused by the growth in current expenses and by the lower dynamism of current revenue, which compared with the year earlier grew by 75% and 46%, respectively. As a result of the deterioration in the province's fiscal results, coupled with the severe local-currency depreciation in 2018 and 2019, Chubut increased its debt levels significantly to 75% of operating revenue in 2019 from 18% in 2014.
At the same time, the ratings capture the very close economic and financial linkages that exist between Argentina´s sovereign and sub-sovereign governments which, currently, ties Chubut's rating very closely to that of Argentina. Moody's notes that Argentina faces a series of macroeconomic challenges that include a weak economy now in its third year of recession, persistently high inflation bolstered by central bank funding of fiscal deficits, and heightened pressures on the exchange rate and international reserves. In Moody's opinion, until the fundamental macroeconomic problems that continue to weigh on the sovereign credit profile are addressed, capital market access will remain limited for the Argentine sub-sovereign governments leading to the elevated credit risks of Chubut.
The Ca rating also takes into consideration that despite the restructuring of the $650 million notes the risk of future debt restructuring remains high because of Chubut's persistent idiosyncratic risks, the restricted market access and a challenging operating environment. While the restructuring materially eases the scheduled debt repayment for 2021 and 2022, Chubut will face debt repayments nearly equal to those faced before the restructuring by 2023, with repayments now exceeding pre-restructuring payments in 2024.
Province of Chubut: foreign currency issuer rating affirmed at Ca and foreign currency senior secured debt ratings affirmed at Ca, Outlook Stable from negative.
RATIONALE FOR THE STABLE OUTLOOK
The outlook change to stable from negative captures Moody's expectation that economic and financial pressure faced by the province will not differ materially over the next 12-18 months and therefore lead to fiscal pressure consistent with recent results. At the same time, the stable outlook incorporates Moody's expectation that bondholders will not face losses exceeding that captured in the Ca rating (a range of 35 - 65%).
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the strong macroeconomic and financial linkages between Argentine Sub-sovereigns and the Government of Argentina, which currently carries a stable outlook, Moody's does not expect upward pressures in the near to medium term for the Province of Chubut. Nevertheless, Moody's would consider an upgrade if financing conditions stabilize and the anticipated losses to private creditors in future debt restructurings are less than currently forecast.
Alternatively, a downgrade in Argentina's bond ratings and/or further systemic deterioration could exert downward pressure on the ratings. Increased idiosyncratic risks could also translate into a downgrade. Moody's would also downgrade the ratings in the event a debt restructuring results in losses greater than those reflected in the current 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_1243406.
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.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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.
Ursula Cassinerio Analyst Sub-Sovereign Group Moody's Latin America ACR Ing. Butty 240 16th Floor Buenos Aires City C1001AFB Argentina JOURNALISTS: 1 800 666 3506 Client Service: 1 212 553 1653 Alejandro Olivo MD-Sovereign/Sub Sovereign Sub-Sovereign Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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