BUENOS AIRES, Argentina--(BUSINESS WIRE)--Effective as of July 11, 2011, Fitch Ratings affirms Salta Hydrocarbon Royalty Trust's global scale foreign currency rating for its USD$234 million targeted amortization notes at 'B'. The Rating Outlook is Stable. This rating level is equal to Argentina's sovereign and country ceiling ratings and addresses the timely payment of interest and ultimate payment of principal by the final maturity date: Dec. 28, 2015. The target maturity date is Dec. 28, 2012.
The bonds continue to amortize with the target schedule being the outstanding balance of USD$62.8 million. Recent collections have been decreasing due to lower oil and gas production levels registered in the last two years that have not been off-set by prices. In 2010, the oil and gas production of the Province of Salta declined 16.0% and 11.5%, respectively, while the royalties were reduced in 11.2% compared to 2009 figures. In the first four months of 2011 the production and royalties continue the negative trend with -13.3%; -8.6% and -17.7%, respectively, over the same period of 2010. The agency expects that the royalties will continue to reduce due to the depletion of the existing wells and the fact that they will not be replaced with new reserves. This situation could imply that the bonds may not reach the target amortization, extending full amortization of the notes beyond 2012.
The negative trend in production level is in line with key credit concerns for the energy sector in Argentina. Government interference is evidenced through price control and export taxes among other items, affecting new investment decisions. This situation implies that the country ceiling rating acts as a cap for this rating.
The notes have the following credit enhancement:
i) Liquidity Reserve: equivalent to six-month of interest (as of June 2011, USD$3.6 million,
ii) Insurance policy covering timely interest payments given by Ace Bermuda Insurance Ltd. The policy covers political risks comprising inconvertibility of pesos into dollars and non-transferability outside of Argentina in a timely manner; expropriation, confiscation, nationalization or other discriminatory legislative action depriving the Trust to use or control their accounts ('inconvertibility events').
iii) Holdback events that upon the occurrence and during the continuance of each of them, the Trustee will retain all excess collections. These holdback events are related to production levels, reserves, and debt service coverage ratios. As of June, 2011, all the ratios were not triggered; nevertheless, the production ratio is at 0.907, very near to the threshold level of 0.90.
The majority of the transaction's legal documents are governed under foreign law. The transaction was structured as a true sale and securitized certain future royalty payments due to the province of Salta from the oil and gas companies. The oil and gas companies signed notice and acknowledgement contracts which obligate them to make payments into the collection account. In accordance with the documents, the cash flows should be legally protected under Argentine law. While these protections exist, the rating on this transaction has always anticipated a heightened degree of political risk given the onshore nature of these cash flows.
The risk of a potential restructuring has been reduced over the past year as the province continues to receive excess collections and has shown relatively good economic performance. Fitch does not believe that the current administration, which has recently renewed its mandate until 2015 (legal maturity of the notes), has any intention of restructuring these notes.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Future Flow Securititzation Rating Criteria' (Jun. 24, 2011).
Applicable Criteria and Related Research:
Future Flow Securitization Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=634949
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