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| DCR Expects to Rate Santiago del Estero's Series 05 Notes 'BB-' |
NEW YORK, June 15 /PRNewswire/ -- Duff & Phelps Credit Rating Co. (DCR)
has assigned a preliminary foreign currency rating of 'BB-' (Double-B-Minus)
to the forthcoming issue of Province of Santiago del Estero's co-participation
tax revenue collateralized medium-term note program, series 05 notes in the
expected principal amount of US$80 million due 2006 (series 05 notes). DCR
also expects to reaffirm the 'BB-' (Double-B-Minus) foreign currency rating of
the series 04 notes due 2008, and the 'B' (Single-B) general obligation debt
rating of the province, both previously issued in August 1998. Santiago del
Estero is one of 23 provinces of the Republic of Argentina.
Subject to confirmation, credit strength of the series 05 notes will be
provided by the collateral, consisting of the greater of (i) a percentage
claim of 10 percent of the monthly aggregate co-participation tax revenue
received by or on behalf of the province from the federal government of
Argentina and (ii) a peso claim of Ps.3.5 million per month. The percentage
claim and peso claim are expected to increase to 14 percent and Ps.4.9 million
per month, respectively, upon the occurrence of a prolonged specified event or
an event of default.
The series 04 and series 05 notes are issued under a US$120 million
medium-term note program undertaken by the province. Legal tenors of the
series 04 and series 05 notes are seven and 10 years, respectively. The
series 04 and series 05 notes rank pari passu with each other and are expected
to share the collateral assigned to the program on a pro rata basis.
Therefore, holders of the series 04 notes are expected to benefit from the
series 05 notes' peso claim priority--a favorable structural change in the
program. Otherwise, the expected transaction structure of the series 05 notes
is ostensibly identical to that of the series 04 notes (refer to DCR's
International New Financing Report: Province of Santiago del Estero).
The rating of the series 04 notes and the preliminary rating assigned to
series 05 notes assume that certain amounts of the proceeds from the series
05 notes issuance that are being placed in escrow with the trustee will, in
fact, be applied to the retirement of provincial indebtedness with prior
claims on the collateral cash flows, in accordance with the final and executed
pricing supplement. In addition, the preliminary rating of the series
05 notes assumes that the funds in escrow with the trustee are earmarked to
defease the series 02 and series 03 notes under the program, which were not
rated by DCR.
The distinction between the 'B' (Single-B) general obligation debt rating
of Santiago del Estero and the preliminary 'BB-' (Double-B-Minus) rating
assigned to the notes is based on the legal protections afforded by the trust
laws of Argentina. Holders of the notes benefit from the trust structure of
the program, which mitigates the risk of any unilateral alteration or
permanent suspension of the terms and conditions of the province's financial
obligations.
Under the trust structure and subject to confirmation, the collateral will
be assigned to the noteholders through the creation and perfection of a
security interest. The assignment of collateral flows to the trust should
prevent any redirection of flows away from noteholders. In addition,
noteholders' interest in the collateral should not be jeopardized even in the
event of a state of emergency declared by both the province and the Republic
of Argentina. General obligation debt creditors, on the other hand, do not
enjoy such protections and could be exposed to default risk to a greater
degree than their counterparts.
Also under the trust structure, holders of series 04 and series 05 notes
are expected to have exclusive control over a set of dedicated accounts
containing flows associated with the collateral assigned to the program.
Funds in these dedicated accounts are segregated from other provincial funds
and, therefore, are not expected to commingle with any other funds or property
of the province. Holders of series 04 and 05 notes further benefit from
overcollateralization, liquidity protection in the form of a six-month debt
service reserve account, and an early amortization event which detects early
warning signals relating to any secular or cyclical decline in flows
associated with the collateral.
The series 04 and series 05 notes constitute a direct and unconditional
obligation of Santiago del Estero. The 'B' (Single-B) general obligation
rating reflects the province's marginal socio-economic profile and its
agriculture-based economy. DCR views favorably the province's low debt levels
and manageable debt-service burden, demonstrated strong political will of the
current provincial government to contain expenditures, and full privatization
of public enterprises in compliance with the spirit of the fiscal and economic
reforms of the Argentine federal government.
Additional credit support is provided by the recent agreement between
Santiago del Estero and the Argentine federal government, under which the
federal government is committed to transfer to the province a total of
Ps.128 million during the 1999 to 2006 period. Annual installments of
Ps.28 million are payable in 1999 and 2000, and annual installments of
Ps.12 million payable between 2001 and 2006. The 1999 and 2000 annual
installments of the settlement will be earmarked as special revenue and set
off against the province's obligations owed to the federal government under
BOTE 10 ('Bonos del Tesoro Nacional'). The remaining annual installments are
unencumbered and officials have indicated their will to apply these monies to
retire outstanding debt, primarily the medium-term note program.
The ultimate beneficial effect of the medium-term note program and the
intergovernmental pact on the province's fiscal position is a reordering of
its debt profile, whereby the average life of debt will be lengthened, and the
cost of debt will be reduced significantly. Provincial actions in this regard
should afford welcome relief into the medium term within a challenging credit
environment.
SOURCE Duff & Phelps Credit Rating Co.
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CONTACT:
Gersan R. Zurita, 212-908-0318,
zurita@dcrco.com, or Ricky Man-Ho Wai, 212-908-0315,
wai@dcrco.com, or Sofia Migueliz, 54-11-4311-3833,
migueliz@dcrargentina.com, all of Duff & Phelps Credit Rating Co.
