MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has affirmed the Municipality of Medellin's long-term rating at 'BBB-'. In addition, Fitch affirms Medellin's long-term local currency rating at 'BBB'. The Rating Outlook remains Stable.
The ratings for Medellin incorporate the city's relevant role in the Colombian economy; the municipality's sound fiscal and financial policies that allow high operating margins and significant cash flow to be maintained; and the important financial support of common dividends transferred from Empresas Publicas de Medellin (EPM), which helps financing major investments. However, the ratings also consider the political risk associated with the public sector; a prospective much higher debt-burden than historical levels, although manageable; and low coverage of pension liabilities, which has been financed in accordance with Colombian Law. According to Fitch's methodologies and criteria, the ratings of the municipality are capped by Colombia's sovereign risk.
Medellin is the second largest economy nationwide with a strong industrial influence, representing (contributing with) about 8% of Colombian GDP. It has strong socio-economic indicators which can be reflected in public services coverage close to 100%. Fitch expects that the significant level of investment in infrastructure helps (allows Medellin) to maintain sustained economic growth in the medium term. However, public security issues, as well as higher-than-national average unemployment rates, (negatively) impact the city's finances.
Quality management has ensured an outstanding fiscal and financial performance with robust and dynamic fiscal revenues and relative controlled operational expenditure, which explains the high operating margins and favorable liquidity levels. Fitch doesn't expect important changes in municipal management at this time.
Through its Development Plan 'Medellin un hogar para la vida', the current administration expects to implement important infrastructure projects. The financing strategy for these projects will be higher tax revenues and transfers and management will also considers access to additional credit resources. Fitch will monitor the development of these projects and the financing plan, which are not expected to press the city's financial flexibility due to the prudent financial policy that Medellin has followed.
In recent years debt levels have been stable, but in 2011 the city took a loan increasing its debt to COP$471,400.4 million (US$263.4 million) as of June 2012. This loan modified Medellin's debt composition by concentrating 59% of it in foreign debt. In 2011, the interest payments represented 1.98% of operational savings, significantly below the maximum limit of 40% that is established in the terms of Colombian Law 358. Likewise, debt represented 61.4% of current revenue, staying below the 80% established as the limit in the mentioned law. Taking Medellin's investment plans into account, its debt levels are expected to rise nearly COP$800,000 million (US$447 million) by 2014. Moreover, considering the composition of debt and the payment of ordinary bonds in 2016, the administration is currently evaluating measures to reduce the risks (exposure to the exchange rate, variable rate and concentration of amortization capital). Fitch will monitor these actions as they occur.
The 100% participation in the EPM represents a credit strength for Medellin due to the important amount of common and special dividends transferred to Medellin from the entity, which are of free disposition and increase its financial flexibility. In 2011, this transfer represented 20% of total income, an amount that the municipality expects to maintain and/or strengthen in the next years. Fitch will continue to monitor the company's various investment plans and their potential impact on Medellin's payment capacity.
Pension liabilities could represent a contingency in the long-term. The pension liabilities have been financed according to Law 549 from 1999, with coverage close to 20%.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Tax Supported Rating Criteria' dated Aug. 14, 2012;
--'International Local and Regional Governments Rating Criteria, Outside the United States', dated Aug. 17, 2012.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
International Local and Regional Governments Rating Criteria - Outside the United States
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684304
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