MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has affirmed State of Aguascalientes' ratings as follows:
--Long-term local currency Issuer Default Ratings (IDR) at 'BBB+',
--Long-term National Rating at 'AA+(mex)'.
The Rating Outlook is Stable
The rating action reflects Fitch's expectation that Aguascalientes will maintain budgetary discipline and strong operating performance resulting in healthy debt service ratios.
KEY RATING DRIVERS
The rating action reflects Aguascalientes' solid operating performance, resulting from strengthening fiscal policies and ongoing monitoring of spending, as well as moderate leverage and sustainability linked to its conservative debt policy. It also considers the dynamism of the local economy and the fact that the state pension liabilities are fully covered. The high dependence on federal revenues, a common feature of the states in Mexico, constrains the rating.
The current administration has had an outstanding performance in terms of local revenue collection, relative control of operating expenditure and definition of mechanisms against possible contingencies, which explains higher generation of free cash flow from operations (FCFO, operating margin) and favorable liquidity levels. In the last five years, its operating margins have been above 20% of current revenue, the increase in its operating margins is reflected in higher investments levels. According to the budget for 2015 and financial statements to April 2015, Fitch forecasts that FCFO will stay around 20%.
At April 30, 2015, the direct debt of Aguascalientes was MXN2,218 million (USD142 million), of which MXN2,120 million were signed with commercial banks maturing in 2031. The remainder of the balance consists of two loans maturing in November 2016. Moreover, the entity does not have short-term loans or guaranteed financing. Considering that no additional debt is contracted by the state, direct debt and other liabilities classified as debt by Fitch will gradually decrease. Moreover, the state's debt burden ratios remain manageable and liquidity levels absorbed most of the debt.
Additionally, the state has hired two zero-coupon-bond-type bank loans with the national development bank whose credit balance at April was MXN879.8 million. The resources were used in the most part in public infrastructure related to new investment in automobile industry, which has impacted positively the south of the state. According to its operation, Aguascalientes is responsible for payment of interest and principal will be cover in a single payment at maturity (20 years), with redemption of the bond. For this reason, Fitch does not consider the balance of these loans in the level of leverage. Meanwhile, interest payments are computed in the indicator of debt service.
Regarding pension liabilities, Aguascalientes stands in a very favorable position compared to Mexican states and other international governments. The entity makes annual actuarial studies. According to the last actuarial valuation, the state's pension liabilities are fully covered for the next 110 years. Additionally, Aguascalientes has strengthened the corporate governance of the institute responsible for the payment of pension. By law has defined the Councils Investment and Risk, and changed the policy of investment.
The provision of water services is the responsibility of decentralized agencies at the municipal level, so this is not a contingency for state finances. Aguascalientes has very good coverage of drinking water and wastewater, ranking among the top nationally. Aguascalientes' program of investment includes improving the availability of water over the medium term.
Aguascalientes benefits from its strategic geographical position and an efficient transport network. The state has a dynamic economy with high generation of jobs and is attractive for foreign investment. According to official statistics, in the last 5 years Aguascalientes has shown high growth in its economy, for 2014 is estimated a growth higher than 10%. The economy is based on a strong manufacturing sector, particularly on a fast-growing automobile industry. In the last two years, Nissan Motors and Daimler announced a USD3.3 billion investment program in the state. Moreover, Aguascalientes registers stronger socioeconomic indicators than the national average.
RATING SENSITIVITIES
An upgrade of the sovereign rating, accompanied by Aguascalientes' solid operating performance, could trigger a positive rating action. The main factors that individually or collectively, lead to a negative rating action include: a significant debt increase (short-term and/or long-term), and a substantial deterioration in its operating margins and cash levels.
Additional information is available on www.fitchratings.com
Applicable Criteria
International Local and Regional Governments Rating Criteria (pub. 18 May 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865254
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985476
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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