In 1997 Tucuman became the first Argentine province to issue a securitization of coparticipation tax revenues from the federal government, in a deal worth $200 million. Now those pioneering efforts could be hampered by political and fiscal turmoil, after a recent economic emergency law passed by the province's legislature prompted Fitch IBCA to place the double-B-minus rated notes on rating alert with negative implications.

A tumultuous political transition and the province's near $1 billion debt led legislators to pass the law, which is largely aimed at controlling the size and cost of the public sector.

However, other provisions in the law provide authority to consolidate debts and rescind contracts, potentially allowing for a rescheduling of the province's 1997 deal.

Though the governor subsequently vetoed this law, a legislative override of this veto is still possible.

"If the province of Tucuman uses its financial emergency powers to restructure its coparticipation debt it would, from a rating agency perspective, have a very negative effect on the market," said Gabriel Torres, director of the structured finance group at Fitch.

The prohibitively high costs of straight bank loans led several Argentine provinces to look to the international debt markets, starting in 1996 when the province of Mendoza tapped the market with an oil and gas royalties securitization. The provinces of Chaco, Corrientes, Rio Negro, Tierra del Fuego and Formosa soon followed suit.

Duff & Phelps also rated the Tucuman transaction double-B-minus, but is not contemplating a possible downgrade at this point. "We are monitoring the situation very closely," said Gersan Zurita, the agency's head of public finance. "We see this mainly as a political issue between the governor and the legislature and we are waiting to see what the outcome is."

According to Zurita, the enactment of the emergency law would only have a short-term effect on other coparticipation deals. "We might see some short-lived nervousness in the market," he said. "At the end of the day, I believe the market will be able to look at each specific province on a case-by-case basis and distinguish between the good credits and the riskier ones."

As proof that the market is not deterred by Tucuman's problems, the province of Tierra del Fuego is working on a $40 million securitization of oil and gas royalties. The deal, which is expected to hit the market in November, is the second tranche of Tierra del Fuego's securitization program. Banco de Valores will be the local arranger, while Banque Privee Edmund de Rothschild will be in charge of international distribution. The notes are expected to feature a 15% coupon.

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