Province of La Rioja 'CCC-' Ratings Affirmed And Off CreditWatch Negative After Payment Of Interest Within Grace Period

  • On March 20, 2020, the Argentine province of La Rioja serviced its $14.7 million interest on its globally issued notes due 2025. This payment occurred within the 30-day grace period established by the notes' terms and conditions.
  • Consequently, we're removing our 'CCC-' ratings from CreditWatch with negative implications, where we placed them on Feb. 28, 2020. We're also affirming the ratings.
  • The negative outlook reflects at least a one-in-three likelihood of default in the next six months.

Rating Action

BUENOS AIRES (S&P Global Ratings) March 25, 2020--S&P Global Ratings affirmed its 'CCC-' long-term foreign and local currency ratings on the province of La Rioja. We also removed the ratings from CreditWatch negative. The outlook is negative.

Outlook

The negative outlook reflects an at least one-in-three likelihood of a downgrade during the next six months if there's increasing evidence that the province will be incapable or unwilling to service its commercial debt in time and in full. We expect the province's budgetary performance and liquidity to remain very weak given Argentina's prolonged recession, heightened by recent and significant external shocks. We consider support from the national government and access to debt markets as very unlikely while Argentina is discussing its own debt management strategy with bondholders, bankers, and the International Monetary Fund.
Downside scenario
We could lower the ratings in the next six months if the province misses any upcoming debt service payment and we don't expect it to pay within the grace period. An exchange offer or similar restructuring that we would classify as distressed would also result in a downgrade.
Upside scenario
We could raise the ratings on the province in the next 6-12 months if unexpected and favorable economic and financial conditions help the province's liquidity position strengthen amid a marked improvement of La Rioja's strategy for timely payment of its financial obligations.

Rationale

On March 20, 2020, the province met a $14.7 million interest payment on its $300 million global notes due 2025 within the 30-day grace period (for interest) established by the notes' terms and conditions, by making use of its own liquidity. According to our methodology, "Timeliness Of Payments: Grace Periods, Guarantees, And Use Of 'D' And 'SD' Ratings," we consider this payment as timely. Therefore, we affirmed our 'CCC-' ratings on the province. The original interest maturity was on Feb. 24, 2020.
The 'CCC-' ratings reflect La Rioja's current vulnerability to nonpayment. We believe the province is dependent on favorable business, financial, and economic conditions to meet its financial obligations.
The province issued its only international bond in 2017 to finance the construction of a wind farm. The first stage of the project started operating in March 2020. Nonetheless, we consider revenues generated from the partial opening of the project wouldn't be enough to cover the province's debt service estimated at $50 million in the next 12 months. Estimates for the energy plant to operate at full capacity are uncertain.
The province will continue to face severe liquidity pressures amid the erosion of its revenue base and higher demand for social spending given the prolonged Argentine recession, exacerbated by the Covid-19 crisis, and global volatility caused by the collapse in oil prices. Moreover, La Rioja is among the most vulnerable provinces in the country to swings in national government funds transfers, because they account for more than 85% of La Rioja's operating revenue. Finally, amid fiscal stress, there are greater risks for the province prioritizing social spending over timely payment of debt service, in our view.

Ratings Score Snapshot

Table 1

La Rioja--Ratings Score Snapshot
Key rating factorsScores
Institutional framework6
Economy  5
Financial management   5
Budgetary performance  4
Liquidity    5
Debt burden   3
Stand-alone credit profileccc-
Issuer credit ratingCCC-
S&P Global Ratings bases its ratings on non-U.S. local and regional governments (LRGs) on the six main rating factors in this table. In the "Methodology For Rating Local And Regional Governments Outside Of The U.S.," published on July 15, 2019, we explain the steps we follow to derive the global scale foreign currency rating on each LRG. The institutional framework is assessed on a six-point scale: 1 is the strongest and 6 the weakest score. Our assessments of economy, financial management, budgetary performance, liquidity, and debt burden are on a five-point scale, with 1 being the strongest score and 5 the weakest.

Key Sovereign Statistics

Table 2


Selected Indicators
2017201820192020bc2021bc2022bc
(Mil. ARP)
Operating revenues20,70127,02542,50262,22581,08499,946
Operating expenditures20,08826,98942,08362,01180,38997,695
Operating balance613364192156952,252
Operating balance (% of operating revenues)3.00.11.00.30.92.3
Capital revenues2,1401,9321,0812,6273,4664,313
Capital expenditures5,0004,2504,4454,5975,9306,958
Balance after capital accounts(2,247)(2,282)(2,945)(1,755)(1,769)(393)
Balance after capital accounts (% of total revenues)(9.8)(7.9)(6.8)(2.7)(2.1)(0.4)
Debt repaid1232042388386047,873
Gross borrowings5,2764719752,5003,2507,800
Balance after borrowings2,905(2,016)(2,208)(93)876(466)
Direct debt (outstanding at year-end)8,18814,51622,72732,14736,38138,006
Direct debt (% of operating revenues)39.653.753.551.744.938.0
Tax-supported debt (outstanding at year-end)8,20814,53722,74832,16836,38138,006
Tax-supported debt (% of consolidated operating revenues)39.453.553.551.644.838.0
Interest (% of operating revenues)2.34.14.54.43.72.8
Local GDP per capita (single units)5,5204,4383,751N/AN/AN/A
National GDP per capita (single units)14,50111,7399,9649,48610,57412,343
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