MONTERREY, Mexico--(BUSINESS WIRE)--On Oct. 27, 2015, Fitch Ratings assigned the highest expected national scale rating of 'AAA(mex)vra' to Mexico's certificates program of up to MXN50 billion to be disbursed during 2015-2018 to monetize the Multiple Contributions Fund (known as FAM, by its initials in Spanish); the certificates will be issued through a financing vehicle. The proceeds will be used to improve education infrastructure in more than 32,000 school facilities, in priority projects identified by the Department of Public Education (SEP), the National Institute of Physical Education Infrastructure (INIFED), and the States, taking into consideration, among other elements and information, the Education Reform Census.
Also, Fitch assigned the expected rating of 'F1+(mex)vra' to the short-term loan program (bridge loans facility) of up to MXN10 billion associated with the same structure.
The purpose of the proposed structure is to monetize FAM resources, and it consists of a financing vehicle through which the States (31 States and the Federal District) that voluntarily access such mechanism may obtain in advance more resources, in exchange for pledging and committing for 25 years their current and future resources from FAM, or to any another equivalent fund or contribution that replaces and/or complements it.
To carry out the transaction, an irrevocable management and issuance trust is created (FE), whose trustee is Banco Invex (rated by Fitch at 'TR1(mex)', highest national scale rating for trustees). One of the purposes of the FE is to receive the pledged FAM contributions from the States, hire the aforementioned financings, fund the principal and interest payment fund of each financing, cover expenses related to the structure, and deliver resources to a distribution trust (FD), whose trustee is Banobras, to distribute the resources to local educational organisms or institutions, in conjunction with the States, to execute the investments in physical education infrastructure.
The expected ratings assigned were based on the robust characteristics granted by the Tax Coordination Act (Ley de Coordinacion Fiscal or LCF) to the FAM, which revenue flow is pledged and used as source of payment. First, the law allows to pledge up to 25% of the greater of: the resources that correspond to FAM in any subsequent year or to the initial year on which FAM was pledged and financing were hired. This characteristic substantially mitigates the volatility risk of the assets that back up the certificates debt service in the long term. Furthermore, the actual amount received, with respect to the budgeted amount, is not adjusted automatically or varies regardless of the federal revenue sharing (RFP) collection actual performance, which means no volatility in the flows within the year.
Another support for the ratings assigned lies in the federal nature and earmarked characteristics of the FAM's resources, which prevails regardless of the same entering into state treasuries, and in the limitation on the destination and application of resources obtained through the certificates set forth by the LCF, which mitigates the risk related to the credit quality of the States. In accordance with Fitch's criteria, the FAM does not form part of the ordinary tax income or current revenues of the States. Therefore, the States that decide to participate at the FAM's monetization scheme will not have a negative effect on their creditworthiness.
Similarly, the ratings were based on the robust structure of the trusts, both legal and financial, coordination and collaboration agreement between States, Ministry of Finance and Public Credit (SHCP), SEP, INIFED, and local educational institutions, as well as on documents related to both the financings and the structure and irrevocable pledging of the FAM resources. To assess the legal strength, Fitch relied on the services of an external highly recognized legal firm that provided a legal opinion on the legal feasibility of the actions, instruments, contracts, agreements, and monetization structure under the applicable law.
The structure and characteristics of certificates provide a fixed interest rate, quarterly or biannual coupon payments, three-year grace period in the payment of principal, and balanced servicing payments from 20 to 22 years (increasing principal amortization). They also contemplate principal and interest payment funds within the trust with a target balance equal to 1.1 times the payments of the next six months. These features substantially reduce the exposure to market risks.
With respect to the short-term bank loans, the FE contemplates their hiring as a bridge mechanism to provide funds to the FD, thereby having an efficient mechanism for obtaining resources that abide by the execution schedules of the agreed education infrastructure works. These loans will be settled with priority with resources originating from the issuance of the stock market certificates. Fitch anticipates that the loans will not exceed altogether MXN10 billion, they will have a payment term between 180 and 360 days, fixed rate, and will allow the early settlement and capitalization of interest.
The financial structure has mechanisms that limit a broader use of the bridge loans or subsequent issuances from putting the actual credit levels at risk. Other relevant obligations for the structure is the joint obligation of the SHCP and SEP to deliver the FAM resources (its education infrastructure component, 54% of the FAM's total) on a monthly basis and in equal amounts month over month during each year throughout the term of the agreement with the States and monetization structure. The SEP further agrees to follow a process to determine future distributions of the FAM, which considers the initial participation coefficients of the States in the structure, the servicing of the certificates, and the expenses related to the FE; observing assignment floors and reference levels for each State.
With the previous considerations, the structure is designed to have coverage close to 1.0x, but not less, and to monetize the FAM using as basis the floor level of pledged resources. In this regard, Fitch takes into account the strength and high certainty of the resource and the characteristics of the financings, emphasizing the fixed rate and balanced payments; which provides very high certainty of timely and total payment of the financings. Notwithstanding the foregoing, the FAM has proved having a growing trend since its origin, linked to the budgetary process of the RFP. This indicates that the coverage of the servicing of the stock market certificates will strengthen in time.
Characteristics of the FAM in the Tax Coordination Act:
Under the LCF, federal contributions are resources that the Federal Government transfers to the public treasuries of the States and, where appropriate, the Municipalities, conditioning their expenditure to the achievement and compliance with the objectives set forth by the LCF for each kind of contribution.
Particularly, the FAM is annually determined in the Federal Expense Budget (PEF) in an amount equal to, for reference purposes only, 0.814% of the RFP (Article 39 of the LCF). The States use in total 54% of the contributions received through the FAM (MXN10.2 billion in 2015) to build, equip, and restore the physical infrastructure of elementary, high school, and higher education, in university modality (Article 40 of the LCF).
The FAM is distributed between the States according to the allocations and rules set forth in the PEF. For such purpose, the SEP has to publish each year the amount that corresponds to each state, the formula used to distribute the resources, the variables used, and their source of information (Article 41 of the LCF). According to the SEP's data, MXN1.694 billion per month were distributed to the 32 States between April and September of 2015 for the concept of FAM in its physical education infrastructure component.
The LCF reform published in December 2013 (Article 52 of the LCF) established that the States may use the contributions of the FAM as a source of payment of obligations assumed, in terms of the agreements entered into with the SHCP. The agreements will define the monetization mechanisms, financing, or similar schemes, as well as the terms and conditions of such schemes, including the acknowledgement of the early receipt of resources and their compensation through time. Also, the resources obtained may only be used for education infrastructure directly related to the purposes set forth in the LCF.
For obligations payable in two or more tax years, the greater of applying 25% to the resources of the relevant year or to the resources of the year in which the obligations were hired (MXN4.707 billion in 2015) may be used for their servicing each year.
The related rating action commentary was published only in Spanish on Oct. 27, 2015. The full original document can be found on Fitch's national webpage www.fitchratings.mx. The title is 'Fitch Asigna Caificaciones Esperadas de AAA(mex)vra y F1+(mex)vra a los Financiamientos Asociados a la Estructura de Certificados de Infraestructura Educativa Nacional para Potenciar el FAM'.
Additional information is available at 'www.fitchratings.com'.