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Rating Action:

Moody's revises the Municipality of Merida's outlook to negative, affirms Baa3/Aa3.mx ratings

 The document has been translated in other languages

14 Sep 2015

Mexico, September 14, 2015 -- Moody's de Mexico changed the outlook on the Municipality of Merida's issuer ratings to negative from stable. At the same time, Moody's affirmed the municipality's Aa3.mx (Mexico National Scale) and Baa3 (Global Scale, local currency) ratings.

RATINGS RATIONALE

Moody's revision of the outlook of the Municipality of Merida's issuer ratings to negative from stable reflects the deterioration of its gross operating margins and the risks that a lawsuit against the municipality will cost MXN 203 million or 9.9% of its operating revenues.

Merida registered a gross operating margin equivalent to 4.5% of operating revenues in 2014 compared to the 11.7% in 2013. The deterioration reflects partially that the municipality had to invest an additional amount to replace 72,000 lamps. However, as of July 2015, operating expenditures growth is still higher than operating revenues growth and it is very likely that the gross operating balance will remain tight and at level lower than Baa3 national peers.

A controversy between AB&C Leasing, the company contracted for changing the public lights with more efficient LED lamps, and Merida ended in a lawsuit and in August 2015, the State Court´s verdict imposed a MXN 203 million payment to the company. Moody's will monitor the new administration's decision to either file the case to the Federal Courts or pay this amount. Moody's considers that if the municipality has to cover such amount, its liquidity and/or debt metrics could face pressure. The payment could cause debt levels to reach a still moderate 16% of operating revenues or net working capital could deteriorate to a 4% of total expenditures compared to a 11.6% of 2014.

The affirmation of the Baa3/Aa3.mx ratings reflects Merida still low net direct and indirect debt levels equivalent to 7.5% of operating revenues as of December 2014 and its strong liquidity position of 11.6% of total expenditures at the end of 2014, a strong level compared to national peers.

WHAT COULD CHANGE THE RATING UP/DOWN

The strengthening of gross operating margins along with the maintenance of low debt levels and a solid liquidity position, could lead to the outlook's stabilization. Further deterioration of operating margins, and an important weakening of the municipality's liquidity or debt levels as a result of the lawsuit or the progressive deterioration of consolidated financial results could exert downward pressure on the ratings.

The principal methodology used in these ratings was Regional and Local Governments published in January 2013. Please see the Credit Policy page on www.moodys.com.mx for a copy of this methodology.

The period of time covered in the financial information used to determine Municipality of Merida's rating is between 01/01/2010 and 31/12/2014 (source: Municipality of Merida).

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 June 2014 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings".

REGULATORY DISCLOSURES

Information sources used to prepare the ratings are the following: parties involved in the ratings, parties not 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 02/07/2014.

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the 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 rating action, and whose ratings may change as a result of this 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 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 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.

Roxana Munoz
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: 001-888-779-5833
SUBSCRIBERS:52-55-1253-5700

David Rubinoff
MD - Sub-Sovereigns
Sub-Sovereign Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 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: 001-888-779-5833
SUBSCRIBERS:52-55-1253-5700

Moody's revises the Municipality of Merida's outlook to negative, affirms Baa3/Aa3.mx ratings
No Related Data.
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