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Related Issuers
Rating Action:

Moody's Assigns Baa2/Aa2.mx debt ratings to an enhanced loan of Instituto para el Desarrollo y Financiamiento (IDEFIN) contracted with Scotiabank

 The document has been translated in other languages

10 Feb 2011

Mexico, February 10, 2011 -- Moody's de Mexico has assigned a rating of Aa2.mx (Mexico National Scale) to a MXN 700 million enhanced loan of the Instituto para el Desarrollo y Financiamiento del Estado de Quintana Roo (IDEFIN) with Scotiabank, contracted in December of 2010, which has been on-lent to the State of Quintana Roo. Moody's Investors Service has also assigned a rating of Baa2 (Global Scale, local currency) to this loan.

Overview of IDEFIN and Loan Structure

IDEFIN is a public decentralized entity of the State of Quintana Roo, created on October 6, 2006. Its purpose is to assist the state, its municipalities, and decentralized entities in accessing credit. As such, IDEFIN can act as a lender, borrowing from financial institutions or the market and then on-lend to the state or another entity. Depending on the loan contract, IDEFIN covers debt service obligations using revenues that flow from these entities.

In the case of this loan, IDEFIN has on-lent the proceeds to the State of Quintana Roo, based on mirror contracts, and the state will service the loan via federal participation transfers. In the loan contract, the State of Quintana Roo has pledged 7% of its federal participation revenues to a trust (Banco Santander, F/2001613) to meet related obligations.

The loan is denominated in Mexican pesos, with an maturity of 10 years and a grace period of 24 months for principal payments. In addition to regular principal payments, which are not sufficient to pay down principal over a 10-year horizon, the loan contract specifies that in year 8 the state will have to make additional monthly contribution to create a sinking fund to help pay off the outstanding amount in year 10. Specifically, the contract establishes that the trust will retain an additional MXN 16.8 million on a monthly basis to create this sinking fund.

Besides the creation of this sinking fund starting in year 8, the bank also has the parallel option to extend the maturity of the loan for an additional 10 years, based on pre-established conditions. If the bank grants the state the option to extend the maturity, all amounts accumulated in the sinking fund would be sent back to the state and the loan would be paid off by a standard amortization schedule over the additional 10 years.

The loan will pay an interest rate composed of the 28-day Mexican Interbank Interest Rate (TIIE in Spanish) plus a spread 85 basis points in the first three years, increasing to 105 basis points from the fourth to the sixth years and then to 195 basis points for the rest of the life of the loan. Proceeds will be used for infrastructure projects.

RATINGS RATIONALE

The Baa2/Aa2.mx ratings assigned to the loan reflects the underlying creditworthiness of the State of Quintana Roo (Ba1/A1.mx) supported by the following legal and credit enhancements and challenges embedded in the loan:

1. Validity of the legal authorization of the transaction, which authorizes the trust to be used as a mechanism for debt service payment.

2. Strong trust structure based on an irrevocable notification to the federal treasury to transfer the rights and flows of participation revenues to the trustee, eliminating commingling risk.

3. Solid level of reserve funds that provide 2x debt service coverage over the life of the loan, constituting a cushion against payment delays.

4. Estimated cash flows generate solid debt service coverage ratios. Under a Moody's base case scenario, cash flows for the loan are projected to provide 2.7x debt service coverage at the lowest point during the life of the loan, which is during the sinking fund accumulation period. Under a Moody's stress case scenario, estimated cash flow for the loan are projected to provide 2.0x debt service coverage at the lowest point during the life of the loan, also during the sinking fund accumulation period.

5. In a scenario where the loan maturity is extended for an additional 10 years, estimated cash flows generate stronger debt service coverage ratios. Specifically, under a Moody's base case scenario, cash flows for the loan would provide 3.3x debt service coverage at the lowest point during the 20 year life of the loan. Under a Moody's stress case scenario, estimated cash flow for the loan would provide 2.6x debt service coverage at the lowest point during the 20 year life of the loan.

6. This loan will share a master trust with six other loans, each backed by a defined percentage of participation revenues. These loans have displayed strong historical cash flows resulting in an average debt service coverage for all the loans within the master trust of 5.5x times during 2009 and 2010, a period that comprises the deep fall in participation transfers.

7. The obligor under the loan contracts is IDEFIN and in the event that the underlying loan contracts were to be annulled or not paid, IDEFIN would not have any revenues to respond. While Moody's recognizes that IDEFIN does not have any assets other than the flows of funds of the State of Quintana Roo for paying debt service, which constitutes a credit challenge, risks are offset by the state's payment and moral obligation (IDEFIN is the financing arm of the state) and the fact that the State of Quintana Roo has sent an irrevocable instruction to TESOFE.

8. While the loan contract contains a cross default clause, risks related to this clause are mitigated by the fact that the clause is limited to senior secured loans, which broadly share similar credit conditions and are paid through the same trust. As such, we do not view this risk as limiting the possibility of rating uplift, given that this clause does not provide a channel or mechanism under which issuer-level credit risks—exogenous to the enhanced loans—can be transferred to the enhanced loans.

In the future, Moody's will assess the impact of new obligations registered into this trust. Specifically, the addition of any obligation with significantly weaker legal or credit enhancements compared to the current obligations within the trust, could exert downward pressure on debt ratings for the loans.

9. Moody's analytic approach for enhanced loans follows a bottom-up approach, working up from the issuer rating of the sub-national entities contracting the loan. As a consequence, a downward revision to the issuer rating may exert downward pressure on the ratings assigned to the state's enhanced loans. As such, a deterioration in Quintana Roo's fiscal performance, leading to a further decline in liquidity and an increase in debt levels exceeding roughly 32% of total revenues, could put downward pressure on the issuer and debt ratings.

The principal methodologies used in these ratings were Regional and Local Governments Outside the US, published in May 2008, The Application of Joint Default Analysis to Regional and Local Governments, published in December 2008, and Enhanced Municipal and State Loans in Mexico, published in January 2011.

The last rating action with respect to IDEFIN and the State of Quintana Roo was taken on November 9, 2010, when Baa2/Aa2.mx ratings were assigned to the following two state loans:

- Scotiabank: MXN 286.5 million

- Banorte: MXN 504.7 million

Moody's National Scale 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 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 ".mx" for Mexico. For further information on Moody's approach to national scale ratings, please refer to Moody's Rating Implementation Guidance published in August 2010 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings."

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning/maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit 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 ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Mexico
Roxana Munoz
Associate Analyst
Sub-Sovereign Group
Moody's de Mexico S.A. de C.V
JOURNALISTS: 001-888-779-5833
SUBSCRIBERS:52-55-1253-5700

London
David Rubinoff
MD - Sub-Sovereigns
Sub-Sovereign Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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: 001-888-779-5833
SUBSCRIBERS:52-55-1253-5700

Moody's Assigns Baa2/Aa2.mx debt ratings to an enhanced loan of Instituto para el Desarrollo y Financiamiento (IDEFIN) contracted with Scotiabank
No Related Data.
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