The FINANCIAL — Fitch Ratings has downgraded the Province of Chubut’s Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) to ‘RD’ from ‘C’ on the recent completion of its consent solicitation. In addition, Fitch lowered Chubut’s Standalone Credit Profile (SCP) to ‘rd’ from ‘c’. Fitch considers the recent conclusion of this debt restructuring process, which closed on Dec. 15, 2020, as a distressed debt exchange (DDE) under our DDE criteria. Subsequently, Fitch has upgraded Chubut’s IDRs to ‘CC’ and raised the SCP to ‘cc’ post settlement of the consent solicitation. Fitch relied on its rating definitions to position the Province’s ratings and SCP.
In addition, Fitch has downgraded the province’s 7.75% original senior secured notes for USD650 million due 2026 (Bocade notes) to ‘D’ from ‘C’ as these notes were subject to a DDE; subsequently Fitch has upgraded to ‘CC’ from ‘D’ the 7.75% amended senior secured notes for USD650 million with new due date of 2030, following the recent conclusion of the province’s external debt restructuring process. The bonds are rated at the same level as the province’s IDRs.
The province of Chubut completed its DDE on Dec. 17, 2020. The province received and accepted a total of USD560.7 million of its USD622.9 million 7.75% senior secured notes due 2026, or 90.02% of acceptance, above the threshold set in the collective action clauses (CACs). The rating actions reflect Chubut’s recent successful external debt restructuring process, continued high refinancing risk, its exposure to Argentina’s challenging macro and public finance environment, sharp fiscal challenges that have deteriorated its operating margin and hinders its liquidity metrics amid the pandemic and worsening economy.
The debt restructuring provides some external debt service relief for the province until YE21. Despite this relief, however, the ‘CC’ IDRs reflect deep liquidity and tight budgetary flexibility. These are driven by fiscal challenges at the national and local level, which continue to hinder the province’s repayment capacity. These challenges include an economic recession greatly exacerbated by the coronavirus pandemic, and the province’s inability to access external markets to address financing needs. Additionally, the ratings reflect the province’s tight liquidity coverage ratios (below 1.0x), which, according to Fitch’s rating case forecast, should continue over the next three years.
The main amendments to Bocade notes included an extension to the notes maturity (from July 2026 to July 2030) to 40 installments from 24, amortization profile (smooth out principal repayments throughout the life of the amended notes, with small payments in 2021 and in the past two years) and easing of the interest rate conditions (step-up at 7.24% up to October 2021, and 7.75% thereafter). The DDE also involves revised covenants related to royalties coverage amount and waiver of trigger events, such as the one that was triggered in July 2020, among the most relevant. With the amended structure, the province will achieve a maximum cumulative debt service relief of USD169 million by October 2023. In addition, modifications were made to the hydrocarbon royalties’ collateral pledge, increased in 27.85%, as well as reserve fund clause modifications.
Risk Profile: ‘Vulnerable’
Chubut’s Vulnerable Risk Profile reflects a ‘Weaker’ evaluation on the six key risk factors (KRFs), considering the country’s structural weaknesses, in which Argentine local and regional governments (LRGs) operate. Argentine LRGs operate in a context of a weak institutional revenue framework and sustainability, high expenditure structures and tight liquidity and FX debt risks, further worsened by macroeconomic recession, high inflation, sharp currency depreciation and market uncertainty. The risk profile for Argentine LRGs is assessed as ‘Vulnerable’, meaning there is a high risk of operating cash flow not covering debt repayment coming due.
Debt Sustainability: ‘b’ category
Fitch classifies the Province of Chubut as a type B LRG, as it covers debt service from cash flow on an annual basis. Under Fitch’s rating case scenario (2020-2022) the primary metric of payback burden (net adjusted debt to operating balance) will be larger than 25x with a score of ‘b’, reflecting the province’s weak and negative operating balances. The actual debt service coverage ratio (operating balance-to-debt service, ADSCR) will continue to be below 1.0x with a score of ‘b’, which means a final ‘b’ debt sustainability assessment.
Chubut is located in the Patagonian region of Argentina, where socioeconomic indicators tend to be better than the national average. Chubut’s economy is based on services. The province is in a strategic geographic position and is one of the top country’s largest oil-producing province, oil and gas royalties represented 27.2% of operating revenue as of 2019.
ESG – Environmental: Chubut has an ESG Relevance Score of ‘4’ for Biodiversity and Natural Resource Management due to the province’s significant economic and financial exposure to the hydrocarbon sector, which negatively impacts the credit profile and is relevant to the rating in conjunction with other factors.
ESG-Social: Province of Chubut has an ESG Relevance Score of ‘4’ for Labour Relations & Practices, in recognition of the Province’s continuous delay in funding employee salaries. The economic lockdown triggered by the coronavirus and depressed oil prices have reduced liquidity metrics and increased payables, including those related to employee salaries, resulting in a negative impact to the credit profile in conjunction with other factors.
ESG – Governance: Chubut has an ESG Relevance Score of ‘5’ for Creditor Rights. The province’s recent DDE and Fitch’s expectation that fiscal challenges at the national and local level will continue to hinder the province’s future ability to repay its debt obligations. This expectation has suppressed the current rating assignment from a higher rating level, and therefore creditor rights remains a key rating driver.
ESG – Governance: The Province has an ESG Relevance Score of ‘4’ for Rule of Law, Institutional and Regulatory Quality and Control of Corruption reflecting the negative impact the weak regulatory framework and national policies of the sovereign have over the province in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.
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