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Global Credit Research - 02 Aug 2010
Mexico, August 02, 2010 -- Moody's Investors Service downgraded the debt rating assigned to the MXN
430 million enhanced loan (original face value) of the Municipality of
Atizapan de Zaragoza to Baa3 from Baa2 (global scale, local currency).
At the same time, Moody's de Mexico affirmed the Mexican National
Scale debt rating of Aa2.mx assigned to the same loan.
The MXN 430 million Scotiabank loan was issued in 2007 (MXN 397 million
outstanding approximately). The enhanced loan has a maturity of
15 years and an interest coupon composed of the 28-day Mexican
Interbank Interest Rate plus 50 basis points. It is a direct obligation
of the municipality and is payable through a trust (Banamex) to which
Atizapan has pledged the rights to 30% of its federal participation
The downgrade of the Global Scale debt rating to Baa3 from Baa2 reflects
the recent downgrade of the issuer rating of the Municipality of Atizapan
de Zaragoza to Ba2 from Ba1, which took into account the recent
deterioration of Atizapan's financial performance. This deterioration,
in Moody's view, increases underlying contract enforcement
risks, economic risks and credit culture risks that may impact loan
performance in the future.
As part of the rating action, Moody's recognizes the existence
of a discrepancy between the amortization calendar of the loan and the
amortization calendar of an interest rate SWAP contract purchased by the
municipality after contracting the loan. Nevertheless, we
do not see this discrepancy as exerting material downward pressure on
the debt rating given the performance of the loan to date and our projections
of future performance, which incorporate the impact of this discrepancy
The affirmation of the Mexican National Scale rating of Aa2.mx
reflects the positioning of the loan relative to peer transactions.
Specifically, the affirmation reflects substantial increases in
reserve levels via a loan modification agreement that occurred following
the contracting of the loan. As a result of this modification,
reserve increased to levels well above original considerations,
averaging 13.9x debt service coverage over the last 24 months.
Although these levels are expected to decline progressively over the life
of the loan, reaching an estimated 5.8x debt service coverage
(as the maturity schedule increases), they far exceed industry standards
and provide significant additional security to the loan holder.
Moreover, the relative strength derived from these high reserves
is also supported by a track record of strong reserve management.
In July 2009, a portion of reserves, which were drawn down
to cover a technical delay in the transfer of participation revenues to
the trust, were automatically replenished in a short time frame.
This illustrates the smooth functioning of the trust structure and efficiency
of the reserve mechanism.
The Baa3 and Aa2.mx debt ratings assigned to the MXN 430 million
loan also reflect the following credit enhancements:
1. The validity of the legal authorization of the transaction and
of the trust to be used as a mechanism for payment of debt service.
2. Strong trust structure based on an irrevocable notification
to the Finance Ministry (Secretaria de Hacienda y Credito Publico) of
the transfer of rights and flows, and on the instruction to the
State of Mexico to send the designated funds to the trustee.
3. Strong overall historical cash flows resulting in an average
monthly debt service coverage of 2.3x during 2009, a period
that comprises a deep fall in federal participation transfers, and
minimum quarterly debt service coverage of 1.1x during Q3 2009.
4. Adequate projected debt service coverage levels despite the
20% revenue drop of 2009 federal participation transfers:
- Under a Moody's base case scenario and considering the actual
SWAP discrepancy, cash flows are projected to provide 1.6x
debt service coverage at the lowest point during the life of the loan.
- Under a Moody's stress scenario and considering the actual SWAP
discrepancy, cash flows are projected to provide 1.5x debt
service coverage at the lowest point during the life of the loan.
The last rating action on the Municipality of Atizapan was taken on 20
November 2007, when Moody's assigned Aa2.mx (Mexico
National Scale Rating) and Baa2 (Global Scale, Local Currency) ratings
to the MXN 430 million enhanced loan.
The principal methodologies used in rating the Municipality of Atizapan
de Zaragoza and its enhanced loan were "Regional and Local Governments
Outside the US" and "The Application of Joint Default Analysis to Regional
and Local Governments", published respectively in May 2008 and December
2008 and available on 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 subdirectory
on Moody's website.
MD - Sub-Sovereigns
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's de Mexico S.A. de C.V
Moody's downgrades Global Scale debt rating on MXN 430 million loan of the Municipality of Atizapan de Zaragoza to Baa3 and affirms National Scale debt rating of Aa2.mx
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
No Related Data.
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