Fitch Keeps Cartagena’s Credit at AA(col) and F1+

Fitch Ratings has affirmed the long- and short-term national ratings of the Tourist and Cultural District of Cartagena de Indias at ‘AA(col)’ and ‘F1+(col)’, respectively. The long-term rating outlook is stable.

Fitch’s assessment takes into account the view that Cartagena’s debt sustainability metrics remain consistent with its current ratings, despite an expected gross debt increase of up to COP1.56 trillion, higher than the previous estimate of COP1.04 trillion from the last rating review.

In this review, the debt repayment ratio, based on projections for 2027 and 2028, has increased to 2.1x (previous review: 1.6x), while the actual debt service coverage ratio (CRSD) decreased to a minimum of 2.2x (previous review: 3.7x). Despite this decline, Fitch’s peer analysis suggests that the ratings remain appropriately positioned.

Key Rating Factors

Risk Profile – ‘Weaker’: The risk profile evaluation remains unchanged from the last review, with four key risk factors rated as ‘Weaker’ and two as ‘Mid-Range’. For further details, refer to Fitch’s release on May 8, 2024.

Debt Sustainability – ‘aa’ Category: Based on Fitch’s methodology for rating local and regional governments, Cartagena is classified as a Type B government, relying on its annual cash flow to cover debt service. The primary metric for assessing debt sustainability is the debt repayment ratio, calculated as adjusted net debt over operating balance.

Fitch projects an average debt repayment ratio of approximately 2.1x between 2027 and 2028 (2023: 0.4x), suggesting an ‘aaa’ evaluation. However, Fitch applies a one-notch penalty, considering that the debt service coverage ratio is expected to fall between 2x and 4x, consistent with an ‘aa’ category.

The increase in Cartagena’s debt repayment ratio is linked to its borrowing plans to finance significant capital expenditure, in line with the city’s investment needs.

Rating Derivation

Cartagena’s ratings result from a combination of a ‘Weaker’ risk profile and an ‘aa’ debt sustainability score. The ratings are influenced by asymmetric risk factors related to management and governance and are compared with similar rated municipalities such as Bucaramanga, Barrancabermeja, and Montería.

Key Assumptions

• Cartagena’s tax revenues are expected to grow at a rate close to nominal GDP, with a projected average annual increase of around 5%.
• General System of Participations (SGP) transfers are projected to grow at an annual rate of approximately 13.6%.
• Operating expenses are expected to grow at an annual rate of around 8.7%, driven by inflation and salary increases.
• The average cost of debt is estimated at 10.2%, with stress scenarios adding 100 basis points in 2025 and 200 basis points between 2026 and 2028.
• A negative average capital balance of approximately COP672.5 billion is projected, with capital expenditure exceeding historical levels.
• Gross debt is expected to increase by COP1.56 trillion as part of Cartagena’s borrowing plans.

Sensitivity of the Rating

Factors that could lead to a positive rating action include a significant reduction in contingent liabilities or improved management and governance. Conversely, a debt repayment ratio approaching 2.5x and a CRSD below 3x could result in a negative rating action.

Issuer Profile

Cartagena, the capital of Bolívar Department, is located on Colombia’s Atlantic coast and had an estimated population of just over one million in 2023. The city has a diversified economy driven by tourism, port activities, and industry.

Debt Structure

As of the end of 2023, Cartagena’s debt stood at approximately COP70 billion, with most of it maturing between 2024 and 2029. The average debt maturity was 4.2 years. The city plans to add COP60 billion in new debt in 2024. Additionally, Cartagena intends to borrow up to COP1.5 trillion in new debt, bringing the total gross debt increase to COP1.56 trillion.

Participation

The ratings were requested by the issuer, the Tourist and Cultural District of Cartagena de Indias.

Adjustments to Financial Statements

Fitch’s adjusted debt figures include the liabilities of Transcaribe and payment agreements with the concessionaires of the city’s mass transit system. Several adjustments were also made to revenue and expenditure categories to reflect their true nature.