Mexico, May 23, 2011 -- Moody's de Mexico downgraded the Municipality of Atizapan's issuer
ratings to B1 (Global Scale, local currency) and Baa2.mx
(Mexico National Scale) from Ba2 and A2.mx, respectively.
The outlook on the issuer ratings remains negative. In addition,
Moody's de Mexico downgraded the debt ratings assigned to the MXN 430
million enhanced loan (original face value) from Scotiabank to Ba2 (Global
Scale, local currency) and A2.mx (Mexico National Scale)
from Baa3 and Aa2.mx, respectively.
The downgrades reflect a greater than expected deterioration in Atizapan's
financial and debt indicators in 2010. Specifically, the
municipality registered 1) a sizable increase in its operating deficit,
2) cash financing requirements for the third consecutive year, and
3) a continued increase in its already high debt levels, including
a sharp rise in short term debt. The deterioration was driven by
a significant increase in the municipality's operating expenditures,
including personal services, transfers and general services,
which was not offset by a corresponding growth in revenues.
The negative outlook reflects Moody's expectation that the Municipality's
debt levels will continue to increase and acknowledges that Atizapan faces
significant challenges to reduce operating expenditures and narrow its
fiscal imbalances. Furthermore, it reflects near to medium
term refinancing risks, given that short term obligations represent
a large portion of total debt.
Atizpan registered a rapid and profound deterioration of operating margins
and recorded a cash financing requirement for a third consecutive year
in 2010. Gross operating balances decreased from a surplus of 14.8%
of operating revenues in 2006 to a deficit of -19.2%
in 2010, and the municipality registered a cash financing requirement
of equal to a substantial 15.8% of total revenues despite
a significant cut in capital expenditures.
The aforementioned financial deterioration resulted in a significant increase
in debt, from no debt in 2006 to 64% of operating revenues
in 2010, which is one of the highest levels of any Mexican municipality
rated by Moody's. This significant increase in debt burden
exerts pressure on Atizapan's already limited financial flexibility and
constrains payment capacity.
In addition, 39.5% of total debt is comprised by short
term loans which has contributed to an extremely weak liquidity position
and potential refinancing risk in the near term. Given that Atizapan
has already pledged the maximum allowed level of 30% of its federal
general fund participation revenues to its existing long term enhanced
loan, it will be challenged in the near term to raise additional
long term funds in order to refinance its short term debt in Moody'
The MXN 430 million (original face value) enhanced loan, issued
in 2007, with a current outstanding amount of approximately MXN
390 million, has a maturity of 15 years and an interest coupon composed
of the 28-day Mexican Interbank plus 50 basis points. The
loan is a direct obligation of the Municipality of Atizapan and is payable
through a trust (Banamex NO. 16223-8) to which the Municipality
of Atizapan has pledged the rights to 30% of its participation
The action on the loan ratings reflect the downgrade of Atizapan's
issuer ratings. It also incorporates the impact of an amendment
to the loan agreement that has cut reserves levels to MXN 20 Million,
or 6x debt service coverage, from an average of 16.2x.
While this is a significant decrease, Moody's notes that the
reserve levels remain high compared to similar transactions.
Although Moody's does not expect upward pressure on the ratings,
if Atizapan successfully a) refinances or repays short term obligations,
b) narrows fiscal imbalances reducing borrowing needs, and c) stabilizes
debt metrics, these could lead to a revision of the outlook back
If Atizapan fails to a) refinance or repay short term obligations,
b) reduce gross operating deficits and cash financing requirements,
and c) limit debt levels below 70% of operating revenues,
these could likely lead to a further downgrade on the ratings.
The ratings on the loan could also be downgraded if debt service coverages
fall materially below our expectations, though we note that it has
been performing well to-date, with average debt service coverages
in excess of 3.0x.
The principal methodologies used in this rating 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
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 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
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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
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Asst Vice President - Analyst
Moody's de Mexico S.A. de C.V
MD - Sub-Sovereigns
Moody's Investors Service Ltd.
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Moody's de Mexico S.A. de C.V
Moody's de Mexico Downgrades the Municipality of Atizapan's Issuer Ratings to B1 and Baa2.mxRatings on MXN 430 million enhanced loan from Scotiabank downgraded to Ba2 and A2.mx
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