Fitch Affirms Medellín’s International Credit Ratings, Outlook Stable

The ratings firm Fitch reaffirmed its opinion on Medellin’s creditworthiness in a release issued today. Edited excerpts follow:

According to Fitch, the rating actions are the result of the city’s relevant role in the Colombian economy; sound, albeit declining, operating margins and significant cash flow; and the important financial support from Empresas Publicas de Medellin (EPM, Foreign and Local Currency IDRs ‘BBB+’), which helps finance major investments.

The main risks or limitations for Medellin are the political risk associated with the public sector, a manageable but higher debt-burden relative to historical, and low coverage of pension liabilities financed according to Colombian Law. Medellin is the second largest economy nationwide with a strong industrial influence. It has strong socioeconomic indicators as indicated by public services coverage close to 100%. In recent years, the municipality has registered a dynamic economy, with an improvement in employment and security indicators.

Medellin has a good fiscal and financial performance, but its operating margin has diminished in the last years. The decline in margins since 2012 was largely attributable to significant increase in staff expenditure following an administrative reform.

–Long-term foreign Issuer Default Rating (IDR) at ‘BBB’,
–Long-term local currency IDR at ‘BBB+’.

Regarding debt, in 2014 Medellin disposed of $50 million (US) with a development bank. Additionally, in August the city issued bonds for COP $248,560 million in two series with maturities of 10 and 30 years. The proceeds were used to repay domestic debt with commercial banks.

Medellin registered COP1,014,453 million (approximately $414.3 million US) debt as of Dec. 31, 2014, concentrating 60% of it in foreign debt, these are not hedged to the exchange rate risk. By 2014 and according Medellin’s estimations, the interest to operational savings ratio ascended to 5.3%, level significantly low relative to the maximum 40% established by the Ley 358 (Law 358). On the other hand, debt represented 78.5% of current revenues at the end of the year, level below the 80% maximum established as a limit in the mentioned law.

Since the commitment through future budget allocations that the administration has adopted as a mechanism to execution of the development plan, the sustainability indicator rose 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.

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.

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, 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 COP2.6 billion and the coverage is for 15.9%, which have been financed according to Law 549 from 1999.

Rating Sensitivities

An upgrade of the country’s sovereign rating, in conjunction with positive trends in Medellin’s operating performance, could trigger a positive rating action. Future developments that may, individually or collectively, lead to a negative rating action include a significant debt increase (short-term and/or long-term), a significant deterioration in operating margins and deterioration of cash levels.