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Rating Action:

Moody's de Mexico assigns A2.MX national scale rating to debt financing of the Judicial City of the State of Oaxaca Project

 The document has been translated in other languages

29 Mar 2011

Approximately MXN 1,428 million of securities affected

New York, March 29, 2011 -- Moody's de México has assigned an A2.mx rating (Mexico national scale) and Ba2 rating (global scale, local currency) to the senior secured bank loan issued by the Operator of the Judicial City of the State of Oaxaca ("Project Co"), in relation to the Judicial City of the State of Oaxaca Public Private Partnership ("The Project"). The outlook on both ratings is stable.

The scope of The Project includes the design, construction, operation and maintenance of the Judicial City of Oaxaca under a Contract for Provision of Services framework with the State of Oaxaca (A2.mx rating in Mexico national scale/ stable, Ba2 global scale, local currency rating/ stable) which expires in 2023. The proceeds of the financing were used predominately to fund construction costs of the Project, which was completed in 2010.

Project Co is now responsible for operating the judicial city under a Public Private Partnership ("P3") performance regime until the end of the Contract for Provision of Services, whereby it receives payments from the State of Oaxaca in return for ensuring the availability of the facility, and has sub-contracted all of its obligations to Marhnos Construcciones, S.A. de C.V ("Marhnos"), a local facility manager. The A2 national scale rating and Ba2 global scale ratings were assigned in accordance with Moody's published rating methodologies for [i] Enhanced Municipal and State Loans in Mexico and [ii] Operating Risks in Privately Financed Public Infrastructure (PFI/PPP/P3) Projects.

The A2.mx Mexico national scale and Ba2 global scale, local currency ratings reflects Moody's bottom up assessment of the operations phase risks of The Project, which include Project Co's obligations to maintain and replace items such as air conditioners, elevators and backup electric plants for the buildings at the Judicial City under a P3 performance regime, which contemplates deductions from State of Oaxaca payments if these obligations are not undertaken within fixed times. The rating further reflects the highly leveraged capital structure used to finance The Project, as well as the risks allocated to Project Co under the Contract for Provision of Services. Finally, the rating reflects the capacity of the State of Oaxaca to meet its availability payments obligations, as enhanced by the allocation of a fixed proportion of its federal participations, to the Project.

Moody's considers Project Co's operations phase obligations, which have been fully sub-contracted to Marhnos, to be standard facilities management tasks which Marhnos is expected to be able to competently undertake. However, we are uncertain of the reasonableness of the performance standards (such as time allocations to remedy instances of non-compliance) under the Contract for Provision of Services, which is a challenge for the rating.

With respect to the capital structure used to finance the Project, we note that the project supports a substantial amount of debt, which reduces Project Co's ability to absorb financial stress and results in low debt service coverage ratios on a senior plus subordinated debt basis when compared to other P3 projects globally. Further, the dedicated debt service reserve for the Project is one month's debt service, as opposed to six months which is Moody's baseline assumption. Debt service over the life of the project is expected to vary within a set range of interest rates, as the Project is funded by variable rate debt which is hedged by entering an interest rate cap agreement.

The terms of the Contract for Provision of Services contains both strengths and weaknesses relative to Contract for Provision of Services for other rated P3 projects. Explicit wording which protects Project Co from losses resulting from change in law or modifications is not present, however off-setting this the Contract for Provision of Services provides strong protections against the State of Oaxaca reducing availability payments to the extent that debt service cannot be met. We further note that Project Co's receipts and payments for equipment maintenance are not a straight pass through which may potentially weaken Project Co's financial profile over time. The termination regime compares well to other rated projects as the Contract for Provision of Services suggests that debt will continue to be paid in the event of termination.

The financing agreements provide strong security to lenders, including first priority security interests in Project Co and a pledge of Project Co's shares. The financing agreements further allow lenders to accelerate repayment in the instance that a breach of contract has a material adverse effect on the financing agreement. This increases the risk of a cross default leading to an acceleration of the senior debt and is a weakness for the rating.

Moody's ratings for operations phase P3 projects are typically capped at the rating of the entity obligated to make availability payments. In this instance, Project Co's rating is capped two notches higher than the State of Oaxaca rating, due to credit enhancement provided by the allocation of a fixed proportion of the State of Oaxaca's federal participations to The Project. Under this arrangement, a trust structure is established which directly receives 20% of the State of Oaxaca's federal participations, with Project Co the first beneficiary of 51% of the trust proceeds. As part of the trust structure, a reserve account with two months worth of availability payments is also funded. In the case that the reserves are fully funded, the trust passes through the federal government contributions to the State of Oaxaca. In the case that a withdrawal is required due to a non payment by the State of Oaxaca, funds are withdrawn from the reserve with the balance refilled with transfers from the federal government, which occur every fifteen days. Moody's has evaluated the credit enhancement provided by this structure in accordance with the Enhanced Municipal and State Loans in Mexico Rating Methodology, and determined that this structure enhances the off-taker rating by two notches.

The stable outlook reflects Moody's expectation that Project Co will competently operate the project incurring minimal performance penalties. Moody's considers there to be limited opportunity for upgrades to Project Co's underlying rating, given its constrained ability to generate additional revenues. Project Co's rating could be downwardly pressured if [i] Project Co's receipts for operating costs do not cover its payments for operating costs, leading to decreased debt service coverage ratios, [ii] Project Co incurs substantial performance penalties under the Contract for Provision of Services or [iii] there is a downgrade in the rating of the State of Oaxaca.

Project Co is a special purpose entity registered under Mexican laws in Mexico City to provide long term services for the design, construction, equipping and maintenance of the facilities of the Judicial City of the State of Oaxaca. The Judicial City of the State of Oaxaca is 13 building complex located in the Agency of Reyes Mantecon of the San Bartolo Coyotepec Municipality; approximately 8.5 miles south from the Oaxaca State capital. The Judicial City houses the administrative offices of the State of Oaxaca, the State Judiciary and part of the State Executive's administrative offices. Of the 13 buildings, 11 are office buildings whilst the other 2 are tribunals. The rationale for the Project was to move state government related buildings to outside the capital city. At the time of this rating, 80% of Project Co's equity was owned by Concesionaria de Proyectos de Infraestructura, S.A. de C.V.; 15% was owned by Grupo Constructor Marhnos S.A. de C.V and the remaining 5% was owned by Red de Servicios a Inmuebles, S.A. de C.V.

The methodologies used in rating this project were "Operating Risk in Privately- Financed Public Infrastructure (PFI/PPP/P3) Projects" and the "Enhanced Municipal and State Loans in Mexico". Both of them can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

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.

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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.

New York
Michael O'Connor
Associate Analyst
Project Finance Group
Moody's Investors Service Pty. Ltd.
JOURNALISTS: (612) 9270-8102
SUBSCRIBERS: (612) 9270-8100

New York
Chee Mee Hu
MD - Project Finance
Project Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's de Mexico assigns A2.MX national scale rating to debt financing of the Judicial City of the State of Oaxaca Project
No Related Data.
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