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Rating Action:

Moody's upgrades Jalisco's issuer ratings to Ba1/A1.mx, maintaining a stable outlook, and upgrades several of the state's debt ratings

 The document has been translated in other languages

12 Jul 2018

Mexico, July 12, 2018 -- Moody's de Mexico (Moody's) upgraded today the issuer ratings of the State of Jalisco to Ba1/A1.mx (Global Scale, local currency/Mexico National Scale) from Ba2/A2.mx. The outlook remains stable.

At the same time, Moody's upgraded to A3/Aaa.mx from Baa1/Aa1.mx the debt ratings of the following four enhanced loans:

- MXN 490 million (original face value) enhanced loan from Banamex

- MXN 1,444 million (original face value) enhanced loan from Banobras

- MXN 249 million (original face value) enhanced loan from Banorte

- MXN 154 million (original face value) enhanced loan from Banorte

Additionally, Moody's also upgraded to Baa1/Aa1.mx from Baa2/Aa2.mx debt ratings of the following seven enhanced loans:

- MXN 389 million (original face value) enhanced loan from Banobras

- MXN 632 million (original face value) enhanced loan from Banorte

- MXN 665 million (original face value) enhanced loan from Interacciones

- MXN 409 million (original face value) enhanced loan from Santander

- MXN 100 million (original face value) enhanced loan from Scotiabank

- MXN 374.7 million (original face value) enhanced loan from Banorte

- MXN 957 million (original face value) enhanced loan from Banorte

RATINGS RATIONALE

RATINGS RATIONALE FOR THE ISSUER RATINGS

The upgrade of the State of Jalisco's issuer ratings reflects a sustained improvement in its credit profile in recent years, supported by its balanced financial results, moderate debt levels and improved liquidity position. Net direct and indirect debt decreased to 17.4% of total revenues in 2017 from 20.5% in 2013, while liquidity measured by cash to current liabilities rose to 0.8x from 0.3x in 2015. At this level, Jalisco's liquidity now exceeds the median of its Ba-rated peers. Going forward, we expect the State of Jalisco's strong financial performance to continue, supported by further growth in own-source revenues, which will allow it to maintain an adequate liquidity position.

The upgrade also reflects the state's strong governance and management practices. In 2013, Jalisco implemented reforms to the state's debt law to require that all short-term debt be secured with a specific revenue pledge to ensure its repayment. Moreover, own source revenues have continuously increased at a compound annual growth rate of 11% during the 2013-2017 period as a result of improving tax collections and the creation of new taxes.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's expectation that Jalisco will face only modest cash financing needs in the short to medium term, and that it will maintain moderate debt levels and a strong liquidity position.

RATINGS RATIONALE FOR THE ENHANCED LOANS RATINGS

The upgrade of debt ratings of the 11 enhanced loans follows the upgrade of the State of Jalisco's issuer rating. The enhanced loan ratings are directly linked to the credit quality of the issuer, which ensures that underlying contract enforcement risks, as well as economic and governance risks (for which the issuer rating serves as a proxy) are embedded in the enhanced loan ratings.

WHAT COULD CHANGE THE RATING UP OR DOWN

Given the stable outlook, it is unlikely that the issuer rating will change in the medium term. However, if the state maintains balanced sustainable financial results while continuing to improve its liquidity metrics, the ratings could face upward pressure. Conversely, a deterioration in the state's financial performance leading to higher than expected debt levels or a sharp decrease of liquidity metrics could exert downward pressure on the issuer ratings.

For the enhanced loans rated at Mexico's country ceiling of A3, an upgrade of the Global Scale rating would only be possible if the sovereign rating is upgraded and if the State of Jalisco's issuer rating and the credit enhancements of the loans are strengthened. Given the link between the loan and the credit quality of the obligor, a downgrade of the State of Jalisco could exert downward pressure on the loan's ratings. The ratings could also face downward pressure if debt service coverage levels fall materially below our expectations.

For the enhanced loans rated as Baa1, an upgrade of the State of Jalisco's issuer ratings would likely result in an upgrade of the enhanced loan ratings. Conversely, a downgrade of the state of Jalisco's issuer ratings or a fall in debt service coverage materially below our expectations would likely result in a downgrade on the enhanced loan ratings.

The principal methodology used in the issuer ratings was Regional and Local Governments published in January 2018. The principal methodology used in the enhanced loan ratings was Rating Methodology for Enhanced Municipal and State Loans in Mexico published in July 2017. 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 State of Jalisco's rating is between 01 January 2013 and 31 December 2017. (source: financial statements of State of Jalisco)

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_1113601.

REGULATORY DISCLOSURES

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 12/04/2018 .

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 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 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: 1 888 779 5833
Client Service: 1 212 553 1653

David Rubinoff
MD - Sub-Sovereigns
Sub-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

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