Through the worst of Argentina's post-devaluation recession, a securitization of oil and gas royalties originated by the province of Salta made good on its payments. But now, six years after the economy touched bottom and subsequently entered a prolonged growth spurt, the province may end up doing what many Argentine issuers did six years ago - restructure.

"Officials from Salta's provincial government have expressed...their intention to propose a restructuring of the notes' terms," said Standard & Poor's in a release. Officials from Salta's finance ministry didn't answer a request for comment.

In anticipation of a potential move by the government, the agency put the deal's B' rating on CreditWatch Negative. Moody's Investors Service rates it Caa2'. The transaction was initially $234 million, with an 11.5% coupon and 14-year maturity. Lehman Brothers lead the issuance in 2001.

The structure is backed by 80% of all royalty payments owed the province by 17 private companies operating concessions in the oil and gas sectors. Exactly what Salta could do to coax investors to accept new terms remained unclear. "Some of the structural bells and whistles are in Argentina and some of them are offshore," said Stephan Feder, a partner at Simpson Thacher & Bartlett, which counseled Lehman on the deal.

The concessionaires covered in the deal pay a percentage of royalty payments directly to an offshore trust account. "The provisions, in addition to a diversified obligor base, negative covenants regarding government interference, and other structural features, limit but do not eliminate the provincial government's ability to carry out its intention to restructure the transaction," S&P said.

The deal is currently up to date on its amortization schedule, having previously fallen behind on principal payments, an event that didn't constitute a default under transaction documents. Assuming the deal made its March 28 coupon payment, the amount outstanding would be $159 million, according to Sol Ventura, an analyst at S&P.

The federal government's cap on energy prices has dampened investment in Salta's gas and oil industry. As a result, lower-than-expected production has curbed the royalty payments into the structure, since they are based on actual sales made by the concessionaires. On the other hand, high prices have mitigated that downward pressure on cash flows.

Sovereign Risk Insurance, on behalf of ACE Bermuda Insurance, provides political risk protection for the deal. The policy has never been drawn. Although during the depths of the economic crisis there was a period when the trustee could not convert and transfer foreign currency, that disruption lasted less than the 90-day period stipulated by the insurance. An attempt by the government to divert payments wouldn't constitute a political risk event, and would therefore not be covered by the policy.

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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