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Rating Action:

Moody's upgrades Veracruz's issuer ratings to B1/Baa2.mx, maintains the stable outlook and upgrades the state's enhanced loan ratings

 The document has been translated in other languages

27 Sep 2019

Mexico, September 27, 2019 -- Moody's de Mexico S.A. de C.V. ("Moody's") upgraded today the issuer ratings for the State of Veracruz to B1/Baa2.mx from B3/B1.mx (Global Scale, local currency/Mexico National Scale), upgraded its baseline credit assessment (BCA) to b1 from of b3 and maintained the stable outlook.

At the same time, Moody's de Mexico upgraded the debt ratings of following enhanced loans issued by the state to Baa1/Aa1.mx (Global Scale, local currency/Mexico National Scale) from Baa3/Aa3.mx:

- MXN 4 billion enhanced loan (original face value) from Banobras with a maturity of 20 years

- MXN 5.2 billion enhanced loan (original face value) from Banobras with a maturity of 25 years

- MXN 4 billion enhanced loan (original face value) from Santander with a maturity of 20 years

- MXN 1 billion enhanced loan (original face value) from Monex with a maturity of 15 years

- MXN 4.054 billion enhanced loan (original face value) from Banorte with a maturity of 20 years

- MXN 6 billion enhanced loan (original face value) from Santander with a maturity of 20 years

- MXN 4 billion enhanced loan (original face value) from Banobras with a maturity of 30 years

- MXN 4 billion enhanced loan (original face value) from Banobras with a maturity of 25 years

- MXN 5 billion enhanced loan (original face value) from Multiva with a maturity of 25 years

- MXN 745 million enhanced loan (original face value) from Interacciones with a maturity of 20 years

RATINGS RATIONALE

RATIONALE FOR THE BCA AND ISSUER RATINGS UPGRADE

The upgrade of the BCA to b1 from b3 and issuer ratings to B1/Baa2.mx from B3/B1.mx reflect an improving outlook for own-source revenue growth and projected modest financial benefits from a planned refinancing of the state's long-term debt, as well as continuing improvements in liquidity and operating performance evident in the state's 2019 quarterly statements and the maintenance of solid governance and transparency practices.

Veracruz is implementing measures that aim to boost its relatively low own-source revenues, including incentive programs to encourage residents to pay past-due vehicle taxes and other proposals that will boost tax collections on an ongoing basis. These efforts reflect improved financial management and planning and Moody's expects they will modestly accelerate growth in own-source revenues. In addition, the state in August launched a bidding process to refinance all of its existing long-term debt in an effort to obtain more favorable financing conditions.

Today's action also captures sustained improvements in the state's liquidity position, including a continued improving trend during the first six months of 2019. Building on the improvement seen in 2018, when Veracruz's cash rose to 0.6x current liabilities at the end of the year from a very weak 0.04x in 2015, as of midyear 2019 the state's liquidity ratio rose further to 1.5x from 1.0x at the same period a year earlier. While a degree of uncertainty about significant off balance sheet items accrued under previous administrations remains, the current administration is working to resolve those potential liabilities.

In addition, current spending has been contained during the first half of the year and the state has benefited from strong growth in non-earmarked federal transfers (participaciones), which Moody's projects will allow the state to post a modest surplus in 2019. In the coming years, Moody's expects Veracruz will continue to report modest cash financing deficits given recurring current and capital spending pressures, but that these shortfalls will be manageable and should allow the state to maintain its liquidity position at around 0.5x at the end of 2019 and 2020, well above levels reported in previous years, and to maintain smaller balances of short term debt than those observed as recently as 2017.

Finally, Veracruz is now publishing its quarterly and annual financial statements in a more timely manner than in previous years, and is complying with disclosure practices required under Mexico's Financial Discipline Law for regional and local governments, which addresses a key concern about the state's level of transparency.

RATIONALE FOR THE UPGRADE OF THE ENHANCED LOAN RATINGS

The upgrade of the enhanced loan ratings to Baa1/Aa1.mx reflects the improvement in the underlying creditworthiness of the State of Veracruz, as well as Moody's projections that the loans will continue to benefit from solid debt service coverage levels. The upgrade also reflects the strong trust structure used to issue the debt, which is based on both an irrevocable instruction and an irrevocable mandate, the latter signed by the state, federal government and lenders, which transfers the rights and flows of Veracruz's general participations fund revenues to the paying trusts. The mandate ensures that the Ministry of Finance will transfer Veracruz's non-earmarked federal transfers (participaciones), directly to the trust even if Veracruz unilaterally tries to alter the agreements. In cases where the issuer has a very low speculative grade rating, such as Veracruz, this trust structure provides a strong level of insulation between the loan and the issuer's idiosyncratic risks.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook of Veracruz's ratings reflects Moody's expectation that the state will continue registering manageable financial deficits in the coming years, allowing it to maintain broadly stable liquidity metrics, and that recent improvements in governance and transparency will be maintained.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

As mentioned above, Veracruz's historically weak governance practices, especially in terms of transparency and disclosure, policy credibility and budget management, have been a material consideration for its ratings, and Moody's will look for recent improvements in these governance practices be sustained over time. Social risks related to unfavorable demographic trends in the state workforce contribute to the state's unfunded pension liabilities. Environmental considerations are not material to the state's ratings.

WHAT COULD CHANGE THE RATING UP/DOWN

If Veracruz begins to consistently report balanced cash financing results that lead to further improvements in its liquidity and additional declines in its short-term debt balances, and provided that it maintains recently adopted stronger transparency, management and governance practices, the ratings could be upgraded. Although a downgrade is currently unlikely in view of the stable ratings outlook, Moody's would consider downgrading Veracruz's ratings if the state's liquidity deteriorates markedly and its dependence on short-term debt rises again, or if governance and management practices deteriorate.

Given the links between the loans and the credit quality of the obligor, changes in the ratings of Veracruz, either upwards or downwards, could have symmetrical impacts on the ratings of the enhanced loans. Additionally, downward pressure could arise if debt service coverage levels fall materially below Moody's current forecasts.

The principal methodology used in rating the issuer ratings was Regional and Local Governments published in January 2018. The principal methodologies used in rating the enhanced loans were Enhanced Municipal and State Loans in Mexico Methodology published in May 2019 and Regional and Local Governments published in January 2018. 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 Veracruz, State of's rating is between 01 January 2014 and 31 December 2018 (source: Financial Statements of the State of Veracruz).

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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1174796.

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 01 July 2019.

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 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

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

No Related Data.
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