Mexico, November 27, 2012 -- Moody's Latin America confirmed the issuer ratings of the Province of Formosa at Caa2/B2.ar. Moody´s Latin America also confirmed the debt ratings of the Province of Formosa at Caa3/Caa2.ar. The outlook of Formosa's issuer rating and debt rating remains negative. This action concludes the review that was initiated on October 17.
The confirmation of the Province of Formosa's issuer ratings of Caa2 (Global Scale, local currency) and B2.ar (Argentinean National Scale, local currency) and debt ratings of Caa3 (Global Scale, foreign currency) and Caa2.ar (Argentinean National Scale, foreign currency) follows the US dollar 5% coupon Co-participation Tax Revenue Secured Notes due 2022 bondholder assembly held on November 9.
A majority of 86.5% of bondholders agreed to receive future principal and interest payments in Argentinean pesos converted at the exchange rate published by Banco de la Nacion Argentina, a state-owned bank. In our view, the revised repayment terms qualify as a distressed exchange and therefore Formosa is considered to be in default in its debt. The terms of the agreement meet Moody's definition of a distressed exchange because they will result in economic losses for bondholders relative to the original promise. Based on the spread between current market and official exchange rates, we estimate losses in the range of 20-30%. The Caa3 debt rating incorporates our expectation that bondholders may likely incur further losses under the revised repayment terms if the market exchange rate continues to increase relative to the benchmark rate.
The negative outlook on Formosa follows the negative outlook assigned to Argentina's B3 local and foreign currency government bond ratings. The outlook reflects the ongoing deterioration in Argentina's operating environment, including a decelerating economy and rising fiscal and foreign exchange pressures. Despite the intrinsic financial characteristics of Argentinean provinces and municipalities, the lack of consistent and predictable policies at the national level affects the institutional framework under which provinces and municipalities operate and ultimately ties their credit quality to that of the Sovereign.
WHAT COULD CHANGE THE RATING UP/DOWN
Moody's does not expect upward pressures in the Province of Formosa's ratings in the near to medium term. Notwithstanding, a change of the sovereign outlook back to stable could lead to a change in Formosa's outlook back to stable. The province could be further downgraded if our assessment on the expected loss to bondholders is greater than the loss implied in the current assigned ratings.
Moody's National Scale Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".ar" for Argentina. For further information on Moody's approach to national scale ratings, please refer to Moody's Rating Methodology published in October 2012 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings".
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