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Related Issuers
Rating Action:

Moody's Assigns Ba1/A1.mx ratings to State of Veracruz's MXN 1.1 billion FISE loan from Banobras

 The document has been translated in other languages

26 Jan 2021

Mexico, January 26, 2021 -- Moody's de Mexico has assigned ratings of Ba1 (Global Scale, Local Currency) and A1.mx (Mexico National Scale Rating) to the State of Veracruz's MXN 1.1 billion FISE bank loan from Banobras that matures in November 2024.

The loan is payable through a trust (851-01908, Banregio as trustee), to which the state has pledged the rights and flows of 25% of the revenue it receives from the Fund for Social Infrastructure for States (FISE), which is a component of the Contribution Fund for Social Infrastructure (FAIS).

RATINGS RATIONALE

The Ba1/A1.mx ratings assigned to the FISE loan reflect the underlying creditworthiness of Veracruz (B1/Baa2.mx, stable) supported by the following legal and credit enhancements:

1. The legal validity of the trust structure, which authorizes the trust to be used as a mechanism to service the debt.

2. An irrevocable instruction to the Federal Treasury (TESOFE) regarding the transfer of rights and flows of the FAIS/FISE revenues to the trust. FAIS/FISE transfers are specifically earmarked for infrastructure projects, but can also be used to service debt acquired to fund public works. The earmarked nature of this revenue limits the incentive for states to attempt to divert these flows in the event of unexpected stress to cover operating needs.

3. Strong debt service coverage levels. The Fiscal Coordination Law stipulates that the amount of FAIS/FISE transfers available to service debt is up to 25% of FAIS/FISE transfers in a given year, or 25% of FAIS/FISE revenue in the year the loan was acquired (in this case, 2020), whichever is higher. This effectively sets a floor on coverage levels given that FAIS/FISE transfers would need to fall by more then 75% below 2020 levels before cash flows became insufficient to cover debt service. Such a decline is unlikely given that FAIS/FISE transfers are fixed each year in the federal budget, making them more stable than non-earmarked transfers (participations), which are vulnerable to economic fluctuations. In the case of Veracruz, FISE transfers have grown at a compound annualized growth rate of 7.8% over the past 10 years.

The assigned ratings also take into account the absence of a dedicated reserve fund to mitigate against possible delays in debt service payments. However, this weakness is somewhat mitigated by a contract feature that tolerates 3 cases of missed debt service payments without penalties, provided the payments are made in full before the next payment period. While this feature is not equivalent to a cash reserve, which can be replenished from excess cash flows and therefore would be available on more than three occasions, the absence of a reserve is also offset by the TESOFE's strong history of timely payment and the relatively short maturity profile of the program (less than four years).

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

An upgrade of the State of Veracruz's issuer ratings could result in an upgrade of the ratings. Conversely, the ratings could face downward pressure if debt service coverage levels fall materially below Moody's expectations. Given the links between the loan and the credit quality of the issuer, a downgrade of the State of Veracruz's issuer ratings could also exert downward pressure on debt ratings for this loan.

The methodologies used in these ratings were Regional and Local Governments published in January 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1091595, and Enhanced Municipal and State Loans in Mexico Methodology published in May 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1157935. Alternatively, please see the Rating Methodologies page on www.moodys.com.mx for a copy of these methodologies.

The period of time covered in the financial information used to determine state of Veracruz' ratings is between 01/01/2015 and 31/12/2019 (source: State of Veracruz financial statements).

Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1216309.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

Information sources used to prepare the rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's information.

The ratings have been disclosed to the rated entity prior to public dissemination.

A general listing of the sources of information used in the rating process, and the structure and voting process for the rating committees responsible for the assignment and monitoring of ratings can be found in the Disclosure tab in www.moodys.com.mx.

The date of the last Credit Rating Action was 21/04/2020.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.mx.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

This credit rating is subject to upgrade or downgrade based on future changes in the financial condition of the Issuer/Security, and said modifications will be made without Moody's de México S.A. de C.V accepting any liability as a result.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on www.moodys.com.mx for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com.mx for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see our website www.moodys.com.mx for further information.

Please see www.moodys.com.mx for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

The ratings issued by Moody's de Mexico are opinions regarding the credit quality of securities and/or their issuers and not a recommendation to invest in any such security and/or issuer.

Please see the ratings tab on the issuer/entity page on www.moodys.com.mx for additional regulatory disclosures for each credit rating.

Matthew Walter
Asst Vice President - Analyst
Sub-Sovereign Group
Moody's de Mexico S.A. de C.V
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
Mexico
JOURNALISTS: 1 888 779 5833
Client Service: 1 212 553 1653

Alejandro Olivo
MD-Sovereign/Sub Sovereign
Sub-Sovereign Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's de Mexico S.A. de C.V
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
Mexico
JOURNALISTS: 1 888 779 5833
Client Service: 1 212 553 1653

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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