Moody's de Mexico assigned debt ratings of Baa1 (Global Scale, local currency) and Aa1.mx (Mexico National Scale) to the MXN 150 million enhanced loan of the municipality of Merida from Banorte. The loan has a maturity of 15 years and is paid through a master trust (Scotiabank, trust number F-1708769326). The loan pays an interest rate composed of the 28-day Mexican Interbank Interest Rate (TIIE in Spanish) plus a spread. RATINGS RATIONALE The Baa1/Aa1.mx debt ratings assigned to the enhanced loan reflect the underlying creditworthiness of the municipality of Merida (Baa3/Aa3.mx, stable), supported by the following legal and credit enhancements embedded in the loan: 1. Validity of the legal authorization of the transaction, which authorizes the trust to be used as a mechanism for debt service payment. 2. Strong trust structure based on an irrevocable instruction to the State of Yucatan regarding the transfer of 40% of the municipality's general participation fund to the trustee. The percentage of the pledged participation revenues that correspond to this enhanced loan is 15% of the general participation fund. 3. Solid debt service coverage ratios: under a Moody's base case scenario estimated cash flows generate 2.2x debt service coverage at the lowest point during the life of the loan. Under a stress case scenario, estimated cash flows provide 1.9x debt service coverage, at the lowest point during the life of the loan. 4. Strong level of reserves that represent a minimum of 3.0x debt service coverage throughout the life of the loan and provide enough cushion against payment delays. WHAT COULD CHANGE THE RATINGS UP/DOWN Given the links between the loan and the credit quality of the obligor, an upgrade of the municipality of Merida's issuer ratings rating would likely result in an upgrade of the National Scale Rating of the loan. The Baa1 Global Scale Rating of the enhanced loan is capped at the rating of the Government of Mexico (Baa1, stable) which originates the transfers to pay debt service obligations. Conversely, a downgrade of the municipality of Merida 's issuer ratings could also exert downward pressure on the debt ratings of the loan. In addition, the ratings could face downward pressure if debt service coverage levels fall materially below our expectations.
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