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Rating Action:

Moody's Places Six Enhanced Loans of Mexican States Under Review for Possible Downgrade

27 Jan 2011

Mexico, January 27, 2011 -- Moody's Investors Service has placed under review for possible downgrade the ratings on the following enhanced loans (original face value referenced):

• MXN 250 million loan of the State of Guerrero contracted with BBVA-Bancomer (Baa2)

• MXN 300 million loan of the State of Nayarit contracted with Banorte (Baa1)

• MXN 300 million loan of the State of Quintana Roo (IDEFIN) contracted with Banamex (Baa2)

• MXN 449.9 million loan of the State of Tabasco contracted with Santander (Baa2)

• MXN 3 billion loan of the State of Tabasco contracted with Banorte (Baa2)

• MXN 2.4 billion bonds of the State of Nuevo Leon (Baa1)

Moody's de Mexico has placed under review for possible downgrade the ratings on the following enhanced loans (original face value referenced):

• MXN 250 million loan of the State of Guerrero contracted with BBVA-Bancomer (Aa2.mx)

• MXN 300 million loan of the State of Nayarit contracted with Banorte (Aa1.mx)

• MXN 300 million loan of the State of Quintana Roo (IDEFIN) contracted with Banamex (Aa2.mx)

• MXN 449.9 million loan of the State of Tabasco contracted with Santander (Aa1.mx)

• MXN 3 billion loan of the State of Tabasco contracted with Banorte (Aa1.mx)

• MXN 2.4 billion bonds of the State of Nuevo Leon (Aaa.mx)

The placing of these loans under review for possible downgrade reflects the presence of unmitigated cross-default clauses in the loan contracts, specifying that the non-payment of other debt gives the lender the right to trigger the early amortization of the enhanced loan, with the loan balance being due immediately. These six loans represent only a small subset of the 71 loans Moody's rates in this sector, the vast majority of which do not contain unmitigated cross default clauses.

Even though the loans possess otherwise strong credit enhancements and performed well during the recent economic contraction, the non-payment of a senior unsecured obligation outside the payment trust may trigger an early amortization, thereby generating refinancing risks for the state in question and jeopardizing the full and timely payment of the senior secured loan.

"Essentially these clauses provide a channel for senior unsecured risks to impact the performance of the senior secured obligations", says Sean Marion, Senior Credit Officer and Team Leader for sub-national ratings in Mexico. The agency also notes that risks related to these clauses have been heightened by a recent shift in borrowing trends, with states and municipalities increasing their reliance on short-term lines of credit to smooth out in-year cash flows and short-term credit facilities to help pay suppliers.

"In the Mexican sub-national sector, we view the credit culture surrounding short-term obligations as somewhat weaker compared to medium and long-term obligations, which increases risks, to a certain extent, that these cross default clauses may be triggered", says Roxana Munoz, an Associate Analyst in Moody's Sub-Sovereign Group.

Moody's will follow-up immediately with the affected issuers to clarify whether they propose to retain these cross-default clauses, or move to amend them, and will conclude its review within two to three months. Where a state elects to remove the clause, or substantially mitigate its impact, the downward rating pressure would be alleviated and the ratings would likely be confirmed. Where the clauses remain unchanged, the ratings would likely be lowered to a level on par with the state's issuer 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.

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."

The last rating action with respect to the State of Guerrero was taken on December 22, 2010, when Moody's assigned debt ratings of Baa3/Aa2.mx to a MXN 375 million enhanced loan.

The last rating action with respect to the State of Nayarit was taken on May 16, 2008, when Moody's lowered the issuer ratings to Ba1/A1.mx.

The last rating action with respect to the State of Quintana Roo was taken on November 09, 2010, when Moody's assigned debt ratings of Baa2/Aa2.mx to two enhanced loans.

The last rating action with respect to the State of Tabasco was taken on December 16, 2009, when Moody's lowered debt ratings to Baa2/Aa1.mx on a MXN 3 billion enhanced loan.

The last rating action with respect to the State of Nuevo León was taken on September 23, 2010, when Moody's assigned ratings of Baa1/Aa1.mx to a MXN 1.6 billion enhanced loan.

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
Sean Marion
VP - Senior Credit Officer
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 Places Six Enhanced Loans of Mexican States Under Review for Possible Downgrade
No Related Data.
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