OREANDA-NEWS. Fitch Ratings has affirmed the following ratings for Seguro Social de Salud del Peru (EsSalud):

--Long-term Foreign Currency Issuer Default Rating (IDR) at 'BBB';
--Long-term Local Currency IDR at 'BBB+'.

The Rating Outlook is Stable.

KEY RATING DRIVERS

EsSalud's ratings primarly reflect the tight link between EsSalud and the Government of Peru (FC IDR 'BBB+'/LC IDR 'A-'). This is attributable to the entity's legal status as a public sector entity of the state, strategic importance, and - to a lesser extent - control of the Peruvian state and integration with its sponsor. Due to the lack of historic monetary support and of an explicit guarantee by the sponsor, the ratings for EsSalud are one notch below Peru's ratings.

EsSalud is subject to tight supervision by the state, which appoints the director of the entity, via Fondo Nacional de Financiamiento de la Actividad Empresarial del Estado (FONAFE), a state entity in charge of regulating and directing the businesses of Peru. Fitch believes that the strength of the state's financial supervision helps prevent potential budgetary tension.

Currently EsSalud has no direct debt or plans to acquire new debt. This is because of Peru's strict control and prudent regulations regarding debt, as mentioned in the Institutional Framework of Peru (Jan. 9, 2014). Instead, EsSalud has resorted to Public Private Partnership PPP schemes. The actual projects are related to the construction and operation of two hospitals and two medical distribution centers in Lima's metropolitan area, which are currently in operation.

The PPPs were financed by Peru Payroll Deduction Finance Limited (PPDFL) Class A zero coupon Notes (rated 'BBB'), which are backed by retribucion por inversiones - certificado de avance de obras (RPI-CAOs), and future payment rights from EsSalud. Total RPI-CAOs provided future cash flows in aggregate of approximately USD230 million. At year-end 2014 the Notes amounted about USD219.4 million.

These Notes are categorized as other debt by Fitch because 12% of EsSalud's contributions are assigned to a master trust for their payment. Also, the amortizations of these notes are classified as debt servicing. Under a base case scenario, Fitch estimates the Notes represent no more than 8% of the consolidated revenues of the entity, and its amortization around 28% of its operating balance. Fitch expects that any unsecured bond issuance will also have the benefit of a trust to ensure that all financial obligations rank pari passu; if this is not the case, the bond issue may have a lower rating than the issuer because of subordination.

EsSalud is contractually obligated to pay the RPIs and RPMOs - retribucion por mantenimiento y operacion - and has assigned a minimum contribution level of 1.25x the total amount of RPI and RPMO obligations to a master trust. The local trustee, FiduPeru, is authorized to increase the amount transferred in order to always equal 1.25x of such obligations.

These payments have an important exchange risk, and given the volatility in the exchange market, the entity performed natural hedge operations for the payment of its obligations in foreign currency for the period 2015 - 2016. Fitch estimates the lowest coverage to be around 1.7x up to 2018. However, under stress scenarios, considering Trecca starts operations, it might need an increase of the amount transferred, causing EsSalud to experience financial pressure, which could invite state interference.

EsSalud's is funded through the 9% social security contributions of all formally employed workers in Peru. On June 18, 2015 the congress approved Act 30334, stipulating that from 2015 on, employees are exempt from paying the 9% contribution from their June and December bonuses. However, Fitch has not included this revenue in its projections. The agency believes this decision could impact the investment and operation of EsSalud in the future and will analyze the support from the Nation.

Due to the kind of service Essalud provides, it has a high operative spending structure. The entity's main expenditures are: personnel costs, acquisition of medicines and medical supplies, and since 2014, PPPs payments. It is important to mention that 78% of the entity's workers in 2014 belonged to a labor union. This is considered by Fitch as a contingency of the entity due to continuous strikes which led to salary increases.

According to FONAFE regulation, EsSalud's operating balance must always be positive. The implications of higher costs and the exemption on bonuses could be more related to the quality of the service. Also, in order for the entity to fulfill their investment projects up to 2018, they are expected to use PEN624.3 million from cash.

EsSalud has good liquidity indicators. In 2014, cash totaled PEN2,006 million mostly composed of short-term deposits (PEN1,939.4 million). These short-term deposits are created by the institutional reserve fund, which must be kept according to law. Current liabilities totaled PEN1,170 million. The increase of 22% mainly consists of more provisions for labor disputes. Current assets to current liabilities represented 3.1x.

In 2014, the population insured by EsSalud represented 34.4% of the country's total population, increasing 3% from 2013. Essalud has a significant workforce, comprised mostly of healthcare workers. In 2014, 83% of employees were in the healthcare area, while the rest were administrative staff. The department of Lima has the three major healthcare networks: Rabagliati, Sabogal and Almenara. Together they concentrate 47.4% of the total nationally insured. At year-end 2014, EsSalud had 407 health facilities in total.

RATING SENSITIVITIES

EsSalud's Rating Outlook is Stable. Fitch does not expect a change in the short term. However, higher levels of support from Peru, and/or an upgrade for the sovereign rating, could trigger a positive rating action. A sovereign downgrade could lead to a negative rating action. A sharp deterioration in operating margins, in conjunction with higher debt levels without any evident support from its sponsor, could have an adverse impact on EsSalud's Outlook or Rating.