MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has affirmed the City (or Municipality) of Medellin, Colombia's ratings as follows:
--Long-term foreign currency (LTFC) at 'BBB-', Positive Outlook;
--Long-term local currency (LTLC) at 'BBB', Positive Outlook;
--National long-term at'AAA(col)', Stable Outlook;
--National short-term at 'F1+(col)';
--COP$141,000 million notes at 'AAA(col)'.
KEY RATING DRIVERS
According to Fitch's methodologies and criteria, the ratings of the Municipality are capped by Colombia's sovereign risk, which Fitch revised the Outlook on to Positive on March 6, 2013.
Medellin's credit strengths remain, including: the city's relevant role in the Colombian economy, the municipality's sound fiscal and financial policies which had allowed maintaining high operating margins and significant cash flow; in addition, to the important financial support of common dividends transferred from Empresas Publicas de Medellin (EPM), which helps financing major investments. Nonetheless, the ratings incorporate the political risk associated with the public sector, a prospective debt-burden much higher than historical, although manageable, and low coverage of pension liabilities, which has been financed according to Colombian Law.
Medellin is the second largest economy nationwide with a strong industrial influence. 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 to maintain sustained economic growth in the medium term.
The quality management has ensured an outstanding fiscal and financial performance, having robust and dynamic fiscal revenues and relative controlled operational expenditure, which explain the high operating margins and favorable liquidity levels. Due to an administrative reform it is expected that operating costs will increase. Fitch expects the operating margin will not be affected significantly.
Regarding debt, Medellin registered COP$535,715 million (approximately US$279.5 million) as of June 30, 2013, concentrating 56% of it in foreign debt. In 2012, interest payment over operating surplus as well as total debt-to-current revenues ratios stayed lower than the 40% an 80% limit established in the terms of Colombian Law 358. The administration plans new debt for an amount up to COP$224,390 million, for modernization and projects about development plan. Moreover, considering the composition of debt and the payment of ordinary bonds in 2016, the administration is currently considering measures to reduce the risks (exposure to the exchange rate). Fitch will monitor the actions defined.
Since the commitment through 'vigencias futuras' that the administration has adopted as a mechanism to execution of the development plan, the sustainability indicator will rise in 2013-2014. Nevertheless, Fitch believes that credit metrics are appropriate for the risk level assigned, and the indicators will fall in the next years.
The 100% participation in the EPM represents credit strength to Medellin due to the important amount of common and special dividends transferred to Medellin from the entity, which are of free disposition, increasing its financial flexibility. Fitch will monitor the different investment plans of the company and its potential impact on the payment capacity of Medellin.
Pension liabilities could represent a contingency in the long-term. According to FONPET the pension liabilities accounted COP$2.4 billion, which have been financed according to Law 549 from 1999.
In administrative practices, Fitch evaluates positively the creation of 'private public agency' because of the potential increase in funding of projects with this modality.
Medellin has been worthy of the prize for the most innovative city in the world in 2013, which has recognized its transformation over the last 20 years. Developments in the system for mobility, environmental sustainability and construction of infrastructure for cultural offerings are the highlights. Additionally, are distinguished the citizen participation in the definition of priorities, the allocation of budget and the development of projects in conjunction with the private sector.
RATING SENSITIVITIES
Positive: An upgrade of the Sovereign rating, accompanied by Medellin's solid operating performance, could trigger a positive rating action.
Negative: The current Rating Outlook is Positive. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a material likelihood, of leading to a rating downgrade. However, future developments that may, individually or collectively, lead to a stabilization of the Outlook include:
--Stabilization of Colombia's sovereign rating;
--Significant debt increase (short-term and/or long-term);
--An important deterioration in its operating margins;
--Deterioration in cash levels
Additional information is available at 'www.fitchratings.com'.
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 April 9, 2013.
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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=704438
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=802707
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