Wall Street Bond Rater Affirms ‘Stable’ Outlook for Medellin Public Debt

U.S.-based bond rater Fitch announced December 21 that it has affirmed a “stable” outlook for Medellin’s public debt.

“The rating action reflects Medellin’s financial strength, its importance in [Colombia’s] national context as well as its manageable debt metrics,” according to Fitch.

The city benefits from a “high and dynamic collection of municipal taxes and significant cash flow, which supports a good financial administration, and the important financial support from [public utility] Empresas Publicas de Medellin (EPM),” according to Fitch.

“The main risks or limitations for Medellin are a manageable but higher debt-burden relative to historical, dynamism of its operating income exceeding expenditure, political risk associated with the public sector and quality of the administration, 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 high coverage of public services. In recent years, the city 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 in 2014 was largely attributable to significant increase in staff expenditure following an administrative reform,” according to the bond rater.

However, the city “is expected [to see] a recovery in its operating margins due to a decrease in operating expenditure,” according to Fitch.

Medellin’s 100% ownership of EPM “represents credit strength to Medellin due to the important amount of common and special dividends transferred from the entity, increasing Medellin’s financial flexibility. Also in 2014 the city received a significant amount from the merger between UNE and Millicom,” Fitch noted.

Medellin had registered a total of  COP1.179 trillion (approximately US$357.5 million) debt as of September 30, 2015, with 67% of that as foreign debt “not hedged to the exchange rate risk,“ according to Fitch.

“Considering the composition of debt and the payment of ordinary bonds in 2016, the administration is considering measures to reduce the risks, and is working to get a hedge to the exposure to the exchange rate,” according to  Fitch.

“By 2014 and according Medellin’s estimations, the interest-to-operational-savings ratio ascended to 5.3%, a 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.

“Pension liabilities could represent a contingency in the long-term. According to Medellin,  the coverage of its pension liabilities will be of 29.4% at the end of 2015, considering resources in Fonpet and its own funds. The coverage has been financed according to Law 549 from 1999,” according to Fitch.