Mexico, November 12, 2020 -- Moody's de Mexico S.A. de C.V. ("Moody's")
downgraded the issuer ratings for the State of Guerrero to Ba3/A3.mx
(Global Scale, local currency/Mexico National Scale) from Ba2/A2.mx,
downgraded its baseline credit assessment (BCA) to ba3 from ba2,
and changed the outlook to stable from negative.
At the same time, Moody's downgraded the debt ratings of the State
of Guerrero's MXN 375 million enhanced loan from Banco Santander
to Baa2/Aa2.mx from Baa1/Aaa.mx.
RATINGS RATIONALE
RATIONALE FOR THE DOWNGRADE OF THE ISSUER RATINGS
The downgrade primarily reflects Guerrero's weak and deteriorating
operating balances and expectations that liquidity, which has already
been declining, will eventually stabilize at weaker levels than
those observed in previous years. Guerrero has a poor regional
economy that is somewhat dependent on tourism, an industry that's
highly sensitive to the economic impact of the pandemic. The state's
finances were already on a weak footing before the public health crisis,
with operating deficits averaging 3.7% of operating revenue
over the past four years thanks to a combination of weak own-source
revenue growth and inconsistent management of operating expenses.
Moody's expects the state's deficits will widen to between
5-7% in 2020 and 2021 as it faces continued declines in
already low own-source revenues and falling non-earmarked
federal transfers (participaciones).
Deficits will cause liquidity to decline in 2020 and 2021 from previously
stronger levels, reducing the state's capacity to manage unforeseen
shocks. Guerrero's ratio of cash/current liabilities has
been steadily declining from 1.3x in 2015 to 0.7x in 2019.
Given expectations of continued deficits, Moody's expects
the state's liquidity ratio will fall to 0.5x by the end
of 2021.
Guerrero also has a relatively high dependence on short-term debt,
which averaged 44% of direct debt between 2017-2019.
Short-term debt will likely decline in 2020 given that there is
a gubernatorial election next year and the state will have to liquidate
all short-term balances by July, three months before the
change in administration, in accordance with the Financial Discipline
Law for States and Municipalities. Moody's expects this will
result in a decline in cash.
RATIONALE FOR THE STABLE OUTLOOK
The change in outlook to stable reflects Moody's expectation that
the state's overall debt levels will remain low, and that,
despite a declining trend in 2020 and 2021, liquidity stress will
begin to subside after short-term debt is paid off in 2021 and
as resumed economic growth causes revenue pressures to abate. Moody's
expects Guerrero's overall liquidity levels will continue to compare
favorably with Ba3 peers.
RATIONALE FOR THE ENHANCED LOAN RATINGS
The downgrade of the enhanced loan ratings reflects the downgrade of Guerrero's
issuer ratings. Moody's methodology on rating enhanced loans in
Mexico establishes that the loan ratings are directly linked to the credit
quality of the issuer, which ensures that underlying contract enforcement
risks, economic risks and credit culture risks (for which the issuer
rating acts as a proxy) are embedded in the enhanced loans ratings.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
If the state substantially improves its operating results, causing
liquidity metrics to improve while maintaining low debt metrics,
the ratings could be upgraded. Conversely, if operating and
cash financing deficits exceed projections, resulting in a larger
than expected drop in liquidity and further increase in the state's
dependence on short-term borrowing, it would put additional
negative pressure on the ratings.
Given the links between the loan and the credit quality of the issuer,
an upgrade of Guerrero's issuer ratings could exert upward pressure
on the ratings of the loan. Conversely, a downgrade of the
issuer ratings could result in a downgrade of the loan ratings.
In addition, the ratings could face downward pressure if debt service
coverage levels fall materially below expectations.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Environmental considerations are not material to Guerrero's ratings.
Social risks are material for Guerrero. Indicators including poverty,
illiteracy and access to basic services are relatively weak in the state,
and it has been affected by increasing levels of violence in recent years.
Social spending, including spending on security, will represent
a recurring financial pressure, although a portion of these expenses
are covered with federal transfers. Additionally, Guerrero
faces unfunded pension liabilities that will generate modest financial
pressure over the medium and long term. Finally, the coronavirus
outbreak is a social risk given the substantial public health and safety
implications and the risk of further spread of the outbreak in the state.
Governance considerations are material to the state's credit profile.
While the state complies in general terms with the institutional framework
determined for all state and municipal governments, including in
their disclosure and transparency practices, its recurring operating
deficits and dependence on short-term loans to cover liquidity
needs reflect weaknesses in planning and budget management practices.
The methodologies used in these ratings were Enhanced Municipal and State
Loans in Mexico Methodology published in May 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1157935,
and Regional and Local Governments published in January 2018 and available
at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1091595.
Alternatively, please see the Rating Methodologies page on www.moodys.com.mx
for a copy of these methodologies.
The period of time covered in the financial information used to determine
Guerrero, State of's rating is between 1/1/2015 and 31/12/2019 (source:
Financial statements of the State of Guerrero).
Moody's National Scale Credit 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 credit 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 ".za"
for South Africa. For further information on Moody's approach to
national scale credit ratings, please refer to Moody's Credit rating
Methodology published in May 2016 entitled "Mapping National Scale Ratings
from Global Scale Ratings". While NSRs have no inherent absolute
meaning in terms of default risk or expected loss, a historical
probability of default consistent with a given NSR can be inferred from
the GSR to which it maps back at that particular point in time.
For information on the historical default rates associated with different
global scale rating categories over different investment horizons,
please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1216309.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
Information sources used to prepare the rating are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's information.
The ratings have been disclosed to the rated entity prior to public dissemination.
A general listing of the sources of information used in the rating process,
and the structure and voting process for the rating committees responsible
for the assignment and monitoring of ratings can be found in the Disclosure
tab in www.moodys.com.mx.
The date of the last Credit Rating Action was 21/4/2020.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For further information please see the ratings tab
on the issuer/entity page for the respective issuer on www.moodys.com.mx.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
This credit rating is subject to upgrade or downgrade based on future
changes in the financial condition of the Issuer/Security, and said
modifications will be made without Moody's de México S.A.
de C.V accepting any liability as a result.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
Moody's considers the quality of information available on the rated entity,
obligation or credit satisfactory for the purposes of issuing a rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a 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 Moody's Rating Symbols and Definitions on www.moodys.com.mx
for further information on the meaning of each rating category and the
definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com.mx
for the last rating action and the rating history. The date on
which some ratings were first released goes back to a time before Moody's
ratings were fully digitized and accurate data may not be available.
Consequently, Moody's provides a date that it believes is the most
reliable and accurate based on the information that is available to it.
Please see our website www.moodys.com.mx for further
information.
Please see www.moodys.com.mx for any updates on changes
to the lead rating analyst and to the Moody's legal entity that has issued
the rating.
The ratings issued by Moody's de Mexico are opinions regarding the credit
quality of securities and/or their issuers and not a recommendation to
invest in any such security and/or issuer.
Please see the ratings tab on the issuer/entity page on www.moodys.com.mx
for additional regulatory disclosures for each credit rating.
Matthew Walter
Asst Vice President - Analyst
Sub-Sovereign Group
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: 1 888 779 5833
Client Service: 1 212 553 1653
Yves Lemay
MD-Sovereign/Sub Sovereign
Sovereign Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
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: 1 888 779 5833
Client Service: 1 212 553 1653
