MONTERREY, Mexico--()--Fitch Ratings has affirmed the 'BBB'- Long-term rating and the Long-term local currency rating of the Metropolitan Municipality of Lima (MML). The Rating Outlooks have been revised to Positive from Stable.
The ratings reflect the importance of MML in the national context as it is the economic and political capital of the country, and the high and dynamic collection of municipal taxes which supports high-margin operations. However, the ratings also factor in the significant investment plans of the MML, of which around 40% is expected to be debt funded, and which will add pressure to current expenditure.
The revision of the Outlook to Positive reflects that despite an increase in debt burden, the strong fiscal position of MML and high operating margins will still result in sound debt metrics comparable with other entities in the 'BBB' category.
MML has the status of a special region with 42 districts within its jurisdiction. Lima accounts for around 45% of Peru's gross domestic product (GDP) and for around 30% of the total population of the country. Population growth has generated an increasing tax base, which together with fiscal policies implemented, has led to a significant increase in municipal income; among which stands out the property transfer tax (alcabala). Also, an important factor in increased revenue generation has been the efforts by the administration to reduce and collect tax arrears.
In general, the budgetary performance of MML has registered strong operating margins, averaging more than 40% in recent years. In addition, modest levels of capital expenditure in the past have contributed to a significant accumulation of reserves which were applied to fund the deficits recorded in 2009 and 2010. For fiscal year 2011, investment was reduced considerably as some of the project implementation was delayed but the investment is likely to pick up from 2012 onwards. Fitch expects that operating margins will remain similar to those generated in recent years.
Population growth and economic prosperity has increased the number of vehicles in the municipality which has generated significant congestion. The local administration has focused on improving mobility in the metropolitan area through the implementation of a number of projects estimated at close to PEN 2,500 million in 2011 - 2014, of which about 40% will be financed through debt. Additionally a number of public projects will be undertaken by the private sector although part of the revenues collected by the city will be earmarked for this, particularly some of proceeds from the toll roads.
MML expects to issue bonds of up to PEN 1,000 million in the next 12 months to finance its investment. Debt as a proportion of current revenues will increase from the current 35% to about 70% by the end of 2014. This debt level is manageable; particularly given the expected growth in the tax base. Presently all debt servicing has priority payment through formal and administrative trust deeds, which is a positive rating factor. Nevertheless, Fitch would expect that any unsecured bond issuance to also have the benefit of a trust to ensure that all financial obligations rank pari passu; if this is not the case the bond issue may have a lower rating than the issuer because of subordination.
MML has a significant number of public companies but these do not represent a significant burden to the MML, either because they are self-financing or because of their limited budget. However, Fitch will monitor their financial situation to ensure that they maintain their financial profiles in line with levels registered in recent years.
Additional information is available on www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 14, 2012;
--'International Local and Regional Governments Rating Criteria Outside United States', dated Aug. 17, 2012.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
International Local and Regional Governments Rating Criteria - Outside the United States