The proposed decree formalizes prior statements from public officials concerning the inflexibility of FBAs in projects experiencing delays, particularly amid growing fiscal pressure. The document outlines specific technical, legal, and financial conditions required to validate the rescheduling of FBAs. Its stated aim is to ensure sufficient funds remain available to meet PPP obligations.

Potential Impact on Credit Quality and Investor Perception

Fitch’s assessment indicates that PPPs in Colombia are typically structured with debt amortization schedules that align with multiyear budgets for FBAs and other revenue sources. The rescheduling of these allocations could disrupt this alignment.

The draft decree also introduces uncertainty regarding the Agencia Nacional de Infraestructura (ANI), a government agency, and its ability to honor its commitments for FBAs and other forms of public support for PPPs. This could negatively affect the perceived credit quality of the ANI’s obligations under concession agreements, potentially raising investor risk perception and dampening appetite for future infrastructure investments in Colombia.

Limited Immediate Impact on Rated Toll Roads

Despite these concerns, Fitch does not anticipate a material impact on the credit ratings of the Colombian toll roads it currently rates. The agency believes the decree’s scope is likely to target projects that have experienced significant delays in contractual execution. Most of the public-initiative toll roads rated by Fitch have either completed construction or are nearing completion. The agency noted that these projects would be less affected by a measure focused on addressing execution delays.

Fitch Ratings building Photo credit: Shashank457 licensed under the Creative Commons Attribution-Share Alike 4.0 International license.

This report offers a comprehensive overview of the financial stability and creditworthiness of local governments in Colombia, reflecting their resilience amid various economic challenges. The high percentage of entities retaining strong credit ratings suggests effective fiscal management and a stable economic environment at the municipal level.

For a detailed analysis, refer to the full report titled “Municipios y Distritos Colombianos Muestran Estabilidad Entrando a 2025” available on Fitch Ratings’ official website.

Headline Image: Cartagena, Colombia. Photo credit: Makalu from Pixabay.

Related Content: Latin American Corporates Quarterly Rating Trends Dashboard – July 2024

Downgrades and upgrades occurred during 2Q24 in nearly every Latin American country and corporate subsectors. There were four fallen angels and one rising star during 2Q24, compared to no cross-over credits during 1Q24 and three fallen angels and no rising stars during 4Q23.

Most of the downgrades to speculative-grade from investment-grade were due to the downgrade of Panama’s sovereign rating to ‘BB+’ from ‘BBB-’. The deteriorating operating environment strengthened the linkage between company credit profiles and the sovereign rating. Either full or partial corporate government ownership of the company or its systemic receipt of government subsidies and financial support was an additional consideration. The rising star was a Mexican company in the building & construction sector.

As of June 2024, three publicly rated issuers in our Latin American corporates portfolio were rated ‘BBB-’/Negative and at risk of falling into high-yield territory. Only one was rated ‘BB+’/Positive, indicating it could be upgraded to investment grade.

For more information on corporate issuers on the edge of different rating categories see Global Corporate Credits on the Cusp Monitor – June 2024.

Fitch noted in its report that GeoPark’s fossil fuel reserves have fallen below seven years, something the firm would be unable to “dramatically reverse” within the next 12 months. Specifically, the big three credit rating agency stated that the company only has a “1P reserve life of 5.4 years” when based on 2022 production standards. And despite the company employing new capital from Ecuador and Colombia to build up its reserves, Fitch believes that GeoPark’s reserve life would likely decrease to 4.6 years by the end of 2023.

In comparison to other independent oil producers in the area, its reserve life is now lower than that of SierraCol (8.0 years), Frontera Energy (8.7 years), and Gran Tierra (7.5 years) while coming in around the same level as CGC Energy (5.4 years).

GeoPark is also noted to have decreased its diversification of resources after the sale of Argentine and Brazilian oil fields, with the company being reliant on the continued steady oil production in Colombia. 

Despite the lack of optimism on that front, however, Fitch believes that GeoPark can increase output to per day to 40,000 barrels of oil equivalent per day by 2024 based on the existing strength of their oil fields in Colombia. This comes even with 2022’s production remaining in comparison to 2021.

A recent report from the company itself showed that its second quarter consolidated average oil and gas production is at 36,581 barrels of equivalent per day, largely due to the stalling of some of its operations in Colombia and Chile. 

In another optimistic turn, Fitch also believes that GeoPark’s gross leverage, or its overall debt to EBITDA ratio, will improve due to rising oil prices, with this number having decreased to 0.8x in 2022 in comparison to the 2.2x the company reported in 2021. 

GeoPark’s conservative financial policies will also likely grant it better financial flexibility in the future, and while its 1P reserve life is below seven years, the credit agency predicts that it will be enough to weather any price volatility in the market in the future. 

The company recently announced that, at predicted oil prices of $80-90 per barrel, it will likely have an EBITDA $490-$560 million USD as well as $120-$140 million USD in free cash flow, of which 40-50% of it will go to the company after taxes.

Photo credit: GeoPark

Proceeds from the issue will be used for general purposes and are expected to count as regulatory Tier 2 capital at the bank, although Fitch does not formally assign equity-credit to these notes. Interest will be paid semiannually. The notes may be redeemed at the option of the issuer no earlier than six years before they are due, subject to prior approval from the Colombian Superintendence of Finance (SFC), if the bank maintains its capital ratios in accordance with regulatory requirements.

 Key Rating Drivers

The upcoming issuance is expected to be rated two notches below GNB’s Viability Rating (VR) of ‘bb+’, to reflect loss severity exclusively. There will be no notching due to incremental nonperformance risk. The notes will be subordinated in right of payment to the prior payment in full, in cash or cash equivalents, of all outstanding obligations due in respect of the bank’s senior liabilities, whether outstanding on the issue date or incurred after that date. Additionally, the notes will be senior in right of payment only to subordinated instruments constituting Tier 2 capital subordinated indebtedness that is designated junior to the notes, subordinated instruments constituting Tier 1 capital and the bank’s capital stock.

The rating on the notes does not incorporate incremental nonperformance risk given the relatively low write-off trigger (regulatory common equity Tier 1 [CET1] at or below 4.5%) – which, in Fitch’s view, would only be effective at the point of nonviability and also considering the fact that coupons are not deferred or cancellable before the principal write-off trigger is activated. If GNB’s capital falls below 4.5%, the outstanding principal amount of these notes may be permanently reduced to the extent required to restore the bank’s capital ratio to 6%. This full write-down feature of the notes heavily influences the two-notch loss severity applied.

The securities, which are expected to comply with local Tier II capital requirements, will rank junior to all senior unsecured creditors, pari passu with all other present or future Tier II capital subordinated indebtedness and senior to the bank’s capital stock, including any other instrument that may qualify at Tier I capital according to local banking regulations.

Rating Sensitivities

Factors that could, individually or collectively, lead to positive rating action/upgrade:

As the expected subordinated debt rating is two notches below GNB’s VR anchor, the expected rating is sensitive to an upgrade in the bank’s VR. The rating is also sensitive to a narrower notching from the VR if there is a change in Fitch’s view on the nonperformance of these instruments on a going concern basis, which is not the baseline scenario.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

As the expected subordinated debt rating is two notches below GNB’s VR anchor, the expected rating is sensitive to a downgrade in the bank’s VR. The rating is also sensitive to a wider notching from the VR if there is a change in Fitch’s view on the nonperformance of these instruments on a going concern basis, which is not the baseline scenario.

For further information about the drivers and rating sensitivities for GNB’s ratings, please refer to the latest press release entitled, “Fitch Takes Actions on Colombian FIs & Related Entities After Sovereign Downgrade” (https://www.fitchratings.com/site/pr/10117458), published April 8, 2020 at www.fitchratings.com.

 Best & Worst Case Rating Scenarios

International scale credit ratings of Financial Institutions issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

  References for substantially material source cited as key driver of rating

The principal sources of information used in the analysis are described in the Applicable Criteria.

 ESG Considerations

Banco GNB Sudameris S.A.: 4; Governance Structure: 4

Unless otherwise disclosed in this section, the highest level of environmental, social and governance (ESG) credit relevance is a score of 3 – ESG issues are credit neutral or have only a minimal credit impact on the entity, due to either their nature or the way in which they are being managed by the entity. The governance structure subfactor has a score of 4 – mainly related to key person risk and business continuity considerations.

The new standalone rating is two notches above junk and aligns with the big three rating agency’s sovereign rating for Colombia.

“The increase in the stand-alone credit profile is a recognition of the company’s stable operating performance, the soundness of its business plan, its solid financial profile achieved through its debt management strategy, and the reasonableness of the dividend policy it has implemented,” said Ecopetrol in a statement about the change.

Among the specific factors noted by Fitch Ratings are Ecopetrol’s stable credit profile and debt situaion. The company had a debt-to-earnings (EBITDA) ratio of 1.3x and a debt-to-reserves ratio of $8 USD per barrel at the close of the third quarter. Both of these figures have improved during the past two years, noted Ecopetrol.

READ MORE: Ecopetrol Reports Big Jump with Profits of $866 Million in the Third Quarter

Ecopetrol has also further shored up its balance sheet by procuring a $665 million USD contingent line of credit with Scotiabank and Mizuho that would give it more balance-sheet protection against oil prices that fall even further or other challenging economic conditions that cut into revenue.

This is in line with the BBB rating and stable outlook that Fitch Ratings has maintained for the nation of Colombia, which is the majority owner of Bancóldex.

The big three credit rating agency also affirmed its support rating floor at BBB for the Bogotá-based development bank as well as the national ratings of its subsidiaries ARCO Grupo Bancoldex S.A. Compania de Financiamiento (Arco) and Fiduciaria Colombiana de Comercio Exterior S.A. (Fiducoldex).

“The affirmation of Bancoldex’s IDRs reflects Fitch’s unchanged view of potential support, if it were needed, by the government of Colombia,” stated Fitch Ratings in its analysis.

Because Bancóldex is primarily a wholesale credit provider, it has slow growth, low margins, and low administrative costs, which combine to keep its volatility low as well. Though this could change if it ramps up is loan issuance, the bank’s operations and high asset quality, particularly given its governmental support, do currently not pose a troubling level of risk.

“Bancóldex’s creditworthiness and ratings are directly linked to those of the sovereign,” states Fitch. “Hence, its ratings and outlook should move in, line with any potential change in Colombia’s ratings.”

The big three rating agency also affirmed the Banagrario’s viability rating at bb.

In its analysis, Fitch highlighted its expectations that the bank will receive support from the government “should it be needed” even though it does not “explicitly guarantee Banagrario’s liabilities.” Nevertheless, the bank maintains a “key role” in helping to develop the national agricultural policy.

“In Fitch’s view, Banagrario’s business model is consistent with its key policy role to develop the government’s agricultural policy,” said Fitch in a statement.

READ MORE: Fitch Assigns BBB Rating to Colombia’s $1.5 Billion USD in 2029 Bonds

“The bank maintains a clear focus and a strong franchise in the small- and medium-sized agricultural producer markets,” it continued. “However, its overall market share in the Colombian banking system is moderate at 4% of total loans and deposits at end June 2018.”

(Photo credit: Jared Wade)

The bonds, which mature on March 15, 2029, were issued on October 3 and have a coupon of 4.5%.

The bond issuance was made to fund governmental liability management transactions and for general budgetary purposes, as characterized by the big three credit rating agency. This included roughly $312 million to purchase outstanding notes due 2019 with a 7.4% coupon.

The company’s rating for the bonds match its BBB long-term, foreign-currency issuer default rating (IDR) for the nation of Colombia, which it affirmed in May.

“The bond rating would be sensitive to any changes in Colombia’s long-term, foreign-currency IDR,” said Fitch in a statement.

Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, and J.P. Morgan Securities LLC served as joint book-running managers for the bond offering.

This is unchanged from the New York-based agency’s previous rating for the country and represents positive news for a government whose budget challenges led a rival rating agency, Standard & Poor’s, to downgrade Colombia’s long-term rating foreign currency rating to BBB-, one level above junk, in December 2017.

The third large global agency, Moody’s Investor Services, has most recently rated Colombia at Baa2, its equivalent to Fitch Rating’s BBB, or two notches above junk. Moody’s did, however, assign Colombia a negative outlook in February.

The BBB affirmation by Fitch Ratings hits during a week when oil prices, the Andean nation’s largest export, rose to a level not seen in nearly four years.

The collapse of oil prices toward the end of 2014 has been the biggest culprit in Colombia’s economic slowdown, contributing to a budget crunch in Bogotá as gross domestic product (GDP) only expanded by 2.0% in 2016 and a paltry 1.8% in 2016, which was the lowest level since 2009.

Colombian Finance Minister Mauricio Cárdenas highlighted the fact that the country has been able to maintain a BBB rating with Fitch Ratings dating back to 2013 and throughout this downturn. To him, managing to not lose this coveted rating — something the government fought to retain when it rose taxes in the final days of 2016 — signifies that the overall investment climate and reputation of Colombia has improved.

“Fitch sees a clear, stable horizon,” said Cárdenas in a statement. “This confirms that an orderly adjustment was made, that the economy is stable, and that the rating agencies now consider Colombia a better place to invest, with lower country risk, than it was in the past.”

Among the factors cited by Fitch Ratings in affirming the rating are Colombia’s debt — which still presents some cause for worry but is in line with BBB peers — and an inflation rate that has moderated over the past 18 months. In April, inflation fell again, albeit slightly, to 3.13%, which is now well within the 2%-4% target range of the Colombian central bank.

The agency also again highlighted its concerns about whether the current account deficit can continue to drop fast enough to hit the rate targets set forth in the country’s so-called “fiscal rule.” Progress in this area looks to be on track for 2018, with higher oil prices helping to ease some of the worry about the deficit meeting the mandated level of 3.1% of GDP. But over the longer term, the macroeconomic fundamentals mean that reaching the lower rates in years to come will be difficult.

“Fitch anticipates that the adjustment of the current account deficit will continue significantly in the coming years due to better export dynamics,” stated Bancolombia, the country’s largest bank, in a note to investors after Fitch affirmed its rating. “Against this, we believe that the correction could be lower due to a rebound in imports in line with the recovery of domestic demand.”

Bancolombia is in agreement with Fitch that Colombia will hit the 2018 target of having a fiscal deficit of 3.1% of GDP. But the Medellín-based bank contrasted the agency’s rationale for 2019 figures with its own (somewhat) more optimistic expectation.

“The agency believes it will be difficult to reach the target of a total deficit of 2.4% of GDP in 2019 in the absence of the implementation of further measures,” stated Bancolombia. “This is explained by increasing pressures on spending in a post-conflict scenario and strengthening of infrastructure. In this regard, we believe the target could be met in 2019, although this would be largely linked to the current dynamics of oil prices.”

Richard Francis of Fitch Ratings, speaking about Colombia today at a Council of the Americas event in Washington, said that Fitch Ratings has forecasted 2.6% GDP growth for the country in 2018. Though below its earlier projection of 2.8%, this figure is in line with the latest prediction of the Colombian central bank. It is, however, below the more optimistic predictions of closer to 3% made in early 2018 by the International Monetary Fund and World Bank.

But while higher growth for 2018 would help ease fiscal concerns to some degree for the incoming president — who will be decided by an election in May that Fitch expects to go to a runoff in June — the budget will remain troublingly tight for the foreseeable, stated Francis.

He added that the remaining challenges will still likely require ongoing adjustments and tough fiscal decisions going forward if Colombia wants to retain the necessary fundamentals, including concerns about adhering to the fiscal rule, to retain its BBB rating.