News Column

Moody's affirms the issuer rating of the Municipality of Zapopan

May 12, 2014

Moody'sde Mexico, S.A. de C.V. (Moody's)

affirmed the rating of the Municipality of Zapopan. At the same time,

Moody's assigned debt ratings of Baa1 (Global Scale, local currency) and (Mexico National Scale) to a MXN 1.237 billion from Banorte

(original face value) with a maturity of 15 years.

The loan is payable through a trust (J.P. Morgan as trustee F/00111), to

which the municipality has pledged the flows and rights to 28% of its

"Fondo General de Participaciones" revenues.


The decision to affirm Zapopan's rating is based on three elements:

1. Though Zapopan's operating balances have deteriorated steadily since

2008,the municipality has implemented measures, both on revenues and

expenditures, to slow the rate of deterioration and produce positive

gross operating balances for 2014 and 2015. The current administration

was able to raise the rates of property taxes on its wealthiest

households this year, which will contribute to the municipality's

financial flexibility. Though we do not anticipate any further

significant increases to local tax rates in the medium-term, we expect

Zapopan to continue exhibiting high levels of own-source revenues and to

moderate the rate of growth of expenditures.

2. Zapopan's high net debt levels will be mitigated by a refinancing plan

to be implemented this year, which will lengthen maturities and reduce

interest payments. Moreover, the current administration does not plan to

issue new debt for the rest of its mandate.

3. Zapopan's own-source revenues are high compared to peers.

Traditionally, Zapopan has had one of the highest levels of own-source

revenues among investment grade Mexican municipalities, a reflection of a

dynamic economy and growing population. This is a positive element, as

own-source revenues provide additional flexibility to Mexican


The Baa1/ debt ratings to the enhanced loan reflect the underlying

credit worthiness of the municipality of Zapopan, 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 notification to the

federal treasury regarding the transfer of rights and flows of

participation revenues to the trustee.

3. Estimated cash flows generate relatively low debt service coverage

ratios. Under a Moody's base case scenario, cash flows within the trust

are projected to provide 1.8X debt service coverage at the lowest point

over the life of the loan. Under a stress case scenario, estimated cash

flows are projected to provide 1.5X debt service coverage at the lowest


4. Strong level of reserves that represent 3.0X debt service coverage

under a stress case scenario and provide enough cushion against payment



A continuous improvement in the gross operating balance, and a steady

reduction in net debt, could exert upward pressures on the issuer rating

and its associated debts. Conversely, further deteriorations in the

levels of debt and gross operating balance could exert downward pressures

on the issuer's and its associated debts' ratings.

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Source: EMBIN (Emerging Markets Business Information News)