While scores of Argentine issuers queued up before investors to restructure their debt after the catastrophic devaluation of December 2001, the province of Salta kept making payments on its $234 million, 11.5% 14-year securitization of oil and gas royalties. And there wasn't only peer pressure bearing on Salta. The province also faced the sovereign's own restructuring process, capital controls imposed by the Central Bank, and the federal government's cap on gas prices, which went a long way in eroding the royalties flowing into the structure.

"We could have jumped on the bandwagon" and defaulted, said Gabriel Chiban, secretary of international finance for the province. "But we understood the value in continuing to pay."

That approach may be finally paying off. Last week, Standard & Poor's put its CCC-' rating on the issuer's securitization, called Salta Hydrocarbon Royalty Trust, on Creditwatch with positive implications. The potential upgrade could stretch to three or four notches, according to Juan de Mollein, director in S&P's emerging market structured finance group. "The crisis was a good test to see if the true sale here would hold up," he said. At issuance, the transaction was rated an investment-grade BBB-.'

For now, Moody's Investors Service has its Caa2' rating on the province stable, according to Maria Muller, senior credit officer at the ratings agency.

Lehman Brothers lead the transaction, which closed Feb. 15, 2001. The deal is backed by 80% of all royalty payments owed the province by about 18 private companies operating concessions in the oil and gas sectors. Among the producers currently are names like British Petroleum.

S&P's positive bias was motivated largely by a recovery in gas and oil prices, which have a direct impact on the royalty payments that flow into the trust, according to de Mollein. In the worst moments of the economic crisis, the Argentine government curbed increases in gas prices. Flat-to-slightly weaker production in the province didn't help matters. Energy output in the province has come in sharply lower than projections, according to an S&P report.

But the recent rebound in prices, particularly of oil, is helping offset some of the lackluster production. "This is strengthening the underlying asset," de Mollein said, pointing out that oil has been accounting for nearly half the royalties as the regulatory control of gas prices has kept them from rising too dramatically. Given that hydrocarbon production in Salta is heavily skewed towards gas production - about six to one for crude oil - a more sustained recovery in gas prices and output is critical for the longer-term health of the transaction.

While Salta may have avoided restructuring, Chiban says the province plans to approach its nine bond investors to renegotiate the 11.5% coupon. "There will be no threat of nonpayment, but we're working towards renegotiation," he said. The deal came out nearly a year before the devaluation, but by that time Argentine risk was trading at steep levels, which had a negative impact on the Salta deal. Chiban pointed out that restructured debt from the sovereign pays lower rates than that of the province, which never defaulted.

Sovereign Risk Insurance, on behalf of ACE Bermuda Insurance, provides political risk protection for the deal. The policy has yet to be drawn, because even when the trustee could not convert and transfer foreign currency, the period of disruption lasted less than the 90-day period stipulated by the insurance.

Salta lies in the Northwest of Argentina, bordering Chile, Bolivia, and Paraguay. Apart from energy reserves, the province's economy relies on tobacco and sugar cultivation and winemaking.

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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