Fitch: Medellin Municipal Bonds Get ‘AAA(col)’ Long-Term Rating

Wall Street bond rater Fitch announced November 23 that it affirmed the city of Medellin’s national long-term bond rating at “AAA(col)” with a “stable” outlook and the short-term rating at ‘F1+(col)’.

Fitch has also affirmed the Long-Term Issuer Default Rating (IDR) at “BBB.”

While the rating outlook “remains negative,” this outlook “reflects the ‘negative outlook’ assigned to Colombia,” according to Fitch.

“The affirmation of the ratings reflects Medellin’s importance in national context as well as its financial strength supported by a good financial administration; operating margins reversed the negative trend; the composition of debt in foreign currency and the currency exchange risk although showing manageable debt metrics, and the important financial support from Empresas Publicas de Medellin (EPM, Foreign and Local Currency IDRs ‘BBB+’),” according to Fitch.

“Fitch considers Medellin’s debt profile to be a strong rating factor with stable trend, reflecting still-high debt burden but manageable debt sustainability metrics.

“Medellin’s debt of COP$1.19 trillion [US$387 million] in 2015 represented 2.3 years of the entity’s current balance, lower than the median of entities rated in the ‘BBB’ category. Out of that figure, 67% of it is foreign debt, which still is not hedged to the exchange rate risk. As a counterbalancing effect, debt service to operating balance represented 18.7% as of the end of 2015.

“As per the internal debt portion, a first program of bond for COP$141,000 million [US$45.8 million] notes will redeem at the end of 2016, which is already budgeted and does not represent liquidity pressures for the entity. The outstanding program for COP$248,560 million [US$80.8 million] in two series matures in 2024 and 2044. The administration has continued its efforts to reduce the risks exposure to the exchange rate although 2016 has not presented favorable market conditions.

“As per the economic factor, Fitch considers it to be strong with stable trend, denoting the relative importance of the city to the national economy representing almost 7% of Colombian GDP.

“Its economy is mainly based on services and commerce although it still maintains a large number of industries important to the national and international trade. It sustains strong socioeconomic indicators with higher coverage of public services, education and health compared to national standards.

“Current administration is led by Mayor Federico Gutierrez, who was elected with no affiliation to any party but with a community movement who promoted his candidature.

“Fitch acknowledges the fiscal capacity of the administration to improve toll collections particularly now that this entrant government has implemented a new model for efficiently managing tax collection coupled with efforts to restrain operating expenditures.

“Medellin benefits from the important dividends, both common and special, received from EPM permitting the municipality to be more flexible to allocate them to finance further capital expenditure. As a whole, dividends have represented around 20% of total income of the city since 2012,” the rating agency added.