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Rating Action:

Moody's affirms the Municipality of Lázaro Cárdenas' issuer ratings and changes the outlook to stable from negative

 The document has been translated in other languages

19 Apr 2021

Mexico, April 19, 2021 -- Moody's de Mexico S.A. de C.V. (Moody's) has affirmed today the b2 baseline credit assessment (BCA) and the B2/Ba2.mx (Global Scale, local currency/Mexico National Scale) issuer ratings of the Municipality of Lázaro Cárdenas and changed the outlook to stable from negative.

RATINGS RATIONALE

RATIONALE FOR THE STABLE OULTOOK

The change in the outlook to stable from negative reflects improved financial management resulting in the continuous improvement of both operating and financial balances over the last two years and improvement in financial position. As a result, Lázaro Cárdenas' liquidity also improved and the municipality ceased the use of short-term debt, however, liquidity remains relatively weak, but in line with other B2 rated Mexican peers.

Lázaro Cárdenas' gross operating balance (GOB) has continually improved in recent years, to 16.2% of operating revenue in 2020 from -6.3% in 2016. This was the result of a higher pace of growth in operating revenues compared to operating expenditures, at a compound annual growth rate (CAGR) of 12% compared to 5.5% over 2016 to 2020. Likewise, the cash financing balance increased over the last two years to an average of 7.3% of total revenues; figures that contrast with the low financing results registered in previous years (0.8% of total revenues on average from 2016 to 2017). Despite the anticipated reduction in federal transfers, we expect that Lázaro Cárdenas will continue to post operating and financial surpluses to average levels of 10.3% of operating revenues and 5.8% of total revenues in 2021, figures that compare favorably with the B2 median for Mexican peers.

As a result of improved financial results, the cash to current liabilities ratio also strengthened to 0.25 times (x) cash to current liabilities in 2020 from 0.15x registered in 2019, although from Moody´s perspective this figure continues to be relatively weak. Based on our expectations that the municipality will continue to post cash financing surpluses we expect that the cash to current liabilities ratio will average 0.37x in 2021-22.

RATIONALE FOR THE AFFIRMATION OF THE RATINGS

The affirmation of the b2 bca and B2/Ba2.mx issuer ratings reflects expectations that credit metrics will remain well positioned in the B2 rating. The municipality has a very low debt burden but faces ongoing challenges in improving their management and budget policies in order to reduce the volatility in their operating and financial balances and consistently improve their liquidity.

Over the past five years, both the financial and operating balances have registered volatility driven by major changes in capital expenditures compared with the capital revenues, whereas the GOB has fluctuated because of the inconsistent collection of taxes. Offsetting these challenges, Lázaro Cárdenas registers a very low debt level equivalent to 2.6% of operating revenues, consisting of a long-term loan backed with federal participations. For 2021-22 we expect that this ratio will remain low at an average of 2.5% of operating revenues.

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

If the municipality were to maintain positive operating and financial balances that resulted in a sustained improvement in the liquidity position, the issuer ratings could face upward pressure. On the contrary, if operating and financial margins were to deteriorate, resulting in a decrease in liquidity in conjunction with the use of short-term debt, the issuer ratings could face downward pressure.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

In Moody's assessment environmental and social considerations are not material for the municipality of Lázaro Cárdenas' ratings.

Governance considerations are material for the municipality of Lázaro Cárdenas' ratings. While the municipality complies in general terms with the rules and regulations of the Mexican institutional framework for all state and municipal governments, the municipality has historically exhibited weak budgeting and planning controls, which are reflected in its volatile operating and financial results.

The principal methodology used in these ratings was Regional and Local Governments published in January 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1091595. Alternatively, please see the Rating Methodologies page on www.moodys.com.mx for a copy of this methodology.

The period of time covered in the financial information used to determine Lázaro Cárdenas, Municipality of's rating is between 01 January 2016 and 30 December 2020 (source: Financial Statements of the Municipality of Lázaro Cárdenas).

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 21/4/2020.

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.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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.

Nuvia Martinez Reyes
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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