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Rating Action:

Moody's assigns debt ratings to an upcoming MXN 71.5 million loan of the Municipality of Cuautitlan Izcalli and affirms the ratings on an outstanding loan

 The document has been translated in other languages

16 Dec 2010

Mexico, December 16, 2010 -- Moody's de Mexico has assigned a debt rating of A1.mx (Mexico National Scale) to an upcoming MXN 71.5 million enhanced loan of the Municipality of Cuautitlan Izcalli from Interacciones. Moody's Investors Service has also assigned a debt rating of Ba1 (Global Scale, local currency) to this loan.

The loan is payable through a trust (Deutsche Bank), to which the municipality has pledged the flows and rights of 8% of its federal participation transfers. The loan, which is denominated in Mexican pesos, with maturity of 15 years, will pay an interest rate composed of the 28-day Mexican Interbank Interest Rate (TIIE) plus a spread of 235 basis points.

RATINGS RATIONALE

Rating Rationale for the MXN 71.5 million loan:

The Ba1/A1.mx ratings assigned to the loan reflect the underlying creditworthiness of the Municipality of Cuautitlan Izcalli (Ba3/Baa1.mx), supported by the following legal and credit enhancements 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 regarding the transfer of rights and flows of participation revenues to the trustee.

3. Solid debt service coverage ratios improved by the interest rate CAP. Estimated cash flows generate, under a Moody's base case scenario, 2.3x debt service coverage at the lowest point during the life of the loan. Under a stress case scenario, estimated cash flows provide 1.9x debt service coverage, at the lowest point during the life of the loan.

4. Strong level of reserve funds that represent 3x debt service coverage over the life of the loan and provide a solid cushion against payment delays.

The rating rationale also recognizes the following credit challenge:

1. The loan is affected by commingling risk at the level of the State of Mexico (Ba2/A2.mx) as the state sends funds to the trust; however, related risks are offset by 1) the state's strong governance and management practices, including a strong credit culture, and 2) legal barriers that prohibit the state from interfering with municipal transfers.

At the same time, Moody's also affirmed the Ba2/A2.mx ratings assigned to a MXN 200 million loan (original face value) from BBVA-Bancomer. This loan, which was first rated in September of 2007, is denominated in Mexican pesos, with maturity of 15 years, and pays an interest rate composed of the 28-day Mexican Interbank Interest Rate (TIIE) plus a spread of 54 basis points. At that time the trustee was Bancomer Services and loan was backed by a pledge of 30% of the municipality's participation transfers (maximum amount allowed for municipalities in State of Mexico). As of November 30, 2010 the outstanding amount of this loan was MXN 175 million.

Recently, the municipality and the lender made two key changes to this loan. First, at the time the loan was originally issued, the trustee, BBVA-Bancomer Services, operated as a separate legal entity from BBVA-Bancomer. Since then BBVA-Bancomer Services has been effectively absorbed by BBVA-Bancomer. In order to avoid the conflict of interest of having the lender and trustee as the same legal entity, which also renders the transaction legally null, the municipality and the lender agreed change the trustee to Deutsche Bank. Second, the municipality and the lender have also agreed to modify the percentage of participation transfers pledged to 15% from 30%.

Rating Rationale to affirm the MXN 200 million loan (original face value) :

The affirmation of the Ba2/A2.mx ratings on the loan reflect the underlying creditworthiness of the Municipality of Cuautitlan Izcalli (Ba3/Baa1.mx), supported by the following legal and credit enhancements embedded in the loan.

1. Validity of the legal authorization of the transaction, including the modification agreements, 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 regarding the transfer of rights and flows of participation revenues to the trustee.

3. Moderate debt service coverage ratios following the modification in pledge levels to 15% of participation transfers. Estimated cash flows generate, under a Moody's base case scenario, 1.5x debt service coverage at the lowest point during the life of the loan. Under a stress case scenario, estimated cash flows provide 1.2x debt service coverage, at the lowest point during the life of the loan.

4. Strong level of reserve funds, based on a fixed amount that represents 3x debt service coverage over the life of the loan and provides a solid cushion against payment delays.

The principal methodologies used in this rating were Regional and Local Governments Outside the US published in May 2008, and The Application of Joint Default Analysis to Regional and Local Governments published in December 2008.

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 Municipality of Cuautitlan Izcalli was taken on September 21, 2007, when Moody's assigned debt ratings of Ba2/A2.mx to the above mentioned MXN 200 million enhanced loan.

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 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
Adrian Javie Garza
Asst Vice President - 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 debt ratings to an upcoming MXN 71.5 million loan of the Municipality of Cuautitlan Izcalli and affirms the ratings on an outstanding loan
No Related Data.
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​
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