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Rating Action:

Moody's rates Fideicomiso Financiero Chubut Regalías Hidrocarburíferas I, an oil and gas royalties securitization in Argentina

 The document has been translated in other languages

27 Jul 2010

USD 150 Million in Debt Securities Affected

Buenos Aires, July 27, 2010 -- Moody's has assigned definitive ratings of Ba3 (Global Scale, Foreign Currency) and Aa1.ar (Argentine National Scale) and of Ba2 (Global Scale, Local Currency) and Aaa.ar (Argentine National Scale) to the VDF A and VDF B Notes of Fideicomiso Financiero Chubut Regalías Hidrocarburíferas I, respectively. The debt securities were issued by Banco de Valores S.A. - acting solely in its capacity as Issuer Trustee.

The notes are backed primarily by hydrocarbon royalties to be paid by Pan American Energy LLC, Argentine Branch (PAE), rated Ba2 (Foreign Currency) and Ba1 (Local Currency). PAE has been awarded the production concession for certain areas in the Province of Chubut, in accordance with the Argentine Hydrocarbon Law and an extraction agreement.

STRUCTURE

The rated securities are obligations of the Fideicomiso Financiero Chubut Regalías Hidrocarburíferas I, a financial trust constituted in Argentina under Law 24.441.

Interest and principal on the notes is payable quarterly. Principal payments have a grace period of one year. The promise on the rated notes is to receive timely interest and principal by legal final maturity, which will occur on July 1, 2020. However, subject to the availability of funds, targeted payments of principal will be made on each quarterly payment date beginning on October 3, 2011. If all scheduled principal payments are made on time, the notes are expected to be paid in full on July 1, 2020.

RATING RATIONALE

The VDF B Notes, although denominated in US dollars, are payable in Argentine pesos, therefore are considered to be local currency obligations and not subject to convertibility and transfer risks. However, the VDF A Notes, which are payable in US dollars, are subject to foreign currency convertibility and transfer risk. The royalty payments will be made to a collection account in Argentina; therefore, Moody's considered the risk that the Argentine Government could limit the ability of the trustee to exchange the royalty payment proceeds into US dollars or to transfer the US dollars to the collection account outside of Argentina, which currently has a foreign currency country ceiling of B2. The risk to the VDF A Notes is mitigated by: i) the availability of a liquidity reserve account in the US covering two quarterly principal and interest payments (or 15 months of interest debt service if bondholders instruct the trustee to use this reserve for interest payments only) , ii) a mechanism that allows for the payment-in-kind of royalties, iii) the Bonex clause, a mechanism available to the trustee to purchase foreign currency denominate bonds in Argentina to be sold offshore, in order to make payments to investors in foreign currency and iv) the relative good performance of similar transactions during 2001-2002's transferability and convertibility restrictions imposed by the Argentine Central Bank.

We also evaluated the probability of a nationalization of hydrocarbon-related assets in Argentina. Although this could be a possible scenario, the probability of occurrence is currently deemed to be low; as such a policy would likely face a strong opposition from the Argentine Provinces. Also, the National Constitution establishes that the Provinces are the original owners of the natural resources, including hydrocarbons, located within their territorial boundaries. We understand that a nationalization of the hydrocarbon resources would require an amendment to the National Constitution.

The sole obligor in this transaction is the designated concessionaire, Pan American Energy LLC. The current credit quality and rating level of PAE is consistent with the ratings assigned to the VDF A and B. The Province should appoint a successor concessionaire if the extraction agreement with PAE is terminated. The successor concessionaire will have the same obligations in this transaction than PAE's.

We have evaluated the sufficiency of the estimated oil and gas production of PAE during the life of the transaction. We have also stressed the domestic oil and gas prices that are used to calculate the royalties' payments. Royalties cashflow is robust and consistent with the ratings assigned to this transaction. Moody's notes that while the production is concentrated in Cerro Dragón, the area consists of many different fields that are in various states of exploitation maturity. PAE has a sound track record as an operator in the Cerro Dragón area.

The notes are a direct obligation of the issuing trust; therefore there is no obligation or recourse to the assets of the Province of Chubut, except for the assigned royalties. Since the sale of the royalties will be characterized as a true sale under Argentine Law, the creditors of the Province, or the Province itself, will have no rights to the assigned royalties. However, if the credit conditions of the Province deteriorate, Moody's believes that the risk that the province would be willing to interfere with the transaction will increase accordingly. To date, there have been no antecedents of reversals of royalty assignments to issuing or guaranty trusts in Argentina. However, there are some negative precedents in terms of the assignment of other provincial revenues (i.e. federal tax coparticipation revenues).

Moody's built a cash-flow model that reproduced many deal-specific characteristics. The main assumptions of the model are the oil and gas estimated production levels (triangular distribution centered around a mean value of 4.54 million m3 for oil and 2,499 million m3 for gas), the oil and gas estimated domestic prices (triangular distribution centered around a mean value of USD32/bbl for oil and USD70/thousand of m3 for gas), and the royalties percentage to be paid by PAE (12% in most scenarios).

Royalties payments are made in Argentine pesos and the rated notes are either payable in US dollars (VDF A) or in Argentine pesos but linked to the US dollar (VDF B). In both cases a devaluation of the Argentine peso may reduce the amount of US dollars available to repay the VDF. We have stressed the domestic hydrocarbon prices to evaluate the sufficiency of the cashflows under higher stress scenarios. For example, the transaction can withstand a drop of 60% in the price of oil and gas from our base case of USD 32/bbl and still pay on a timely basis.

Other methodologies and factors that may have been considered in the process of rating this transaction can also be found in the Rating Methodologies subdirectory on Moody's website. For more information on this transaction, please refer to the New Issue Report to be published in moodys.com. In addition, Moody's publishes a weekly summary of structured finance credit, ratings and methodologies, available to all registered users of our website, at www.moodys.com/SFQuickCheck.

RATING ACTION

Originator: Province of Chubut

VDF A Fixed Rate Debt Securities of "Fideicomiso Financiero Chubut Regalías Hidrocarburíferas I", rated Aa1.ar (Argentine National Scale) and Ba3 (Global Scale, Foreign Currency)

VDF B Fixed Rate Debt Securities of "Fideicomiso Financiero Chubut Regalías Hidrocarburíferas I", rated Aaa.ar (Argentine National Scale) and Ba2 (Global Scale, Local Currency)

New York
Maria Muller
Senior Vice President
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Buenos Aires
Martin Fernandez Romero
Vice President - Senior Analyst
Structured Finance Group

Moody's rates Fideicomiso Financiero Chubut Regalías Hidrocarburíferas I, an oil and gas royalties securitization in Argentina
No Related Data.
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