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
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
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
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
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
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
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for Mexico. For further information on Moody's approach to national
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published in August 2010 entitled "Mapping Moody's National Scale
Ratings to Global Scale Ratings."
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Moody's de Mexico S.A. de C.V
Moody's Assigns Baa2/Aa2.mx debt ratings to an enhanced loan of Instituto para el Desarrollo y Financiamiento (IDEFIN) contracted with Scotiabank
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