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Global Credit Research - 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
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
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.
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.
Project Finance Group
Moody's Investors Service Pty. Ltd.
JOURNALISTS: (612) 9270-8102
SUBSCRIBERS: (612) 9270-8100
Chee Mee Hu
MD - Project Finance
Project Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's de Mexico assigns A2.MX national scale rating to debt financing of the Judicial City of the State of Oaxaca Project
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