MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has upgraded to 'BBB' from 'BBB-' the State of Aguascalientes' local currency long-term issuer rating. The Rating Outlook is Stable.
The upgrade of Aguascalientes' international rating reflects the upgrade of Mexico's long-term local currency Issuer Default Rating (IDR) to 'A-' from 'BBB+' on May 8, 2013. It also considers the expected positive effects from the structural reforms that the Federal Government is in the process of adopting and implementing. The most important impact for the Mexican states is expected from the tax reform, mainly through higher resources from the Federation, which will benefit Aguascalientes.
KEY RATING DRIVERS
The rating reflects Aguascalientes sound operating performance, resulting from strengthening fiscal policies and ongoing monitoring of spending, leading to manageable debt ratios. It also considers the dynamism of the local economy and the fact that the state pension liabilities are fully covered. The rating further reflects Fitch's expectation that the regional government will maintain budgetary discipline and will generate strong operating margins in the following years.
Since the beginning of the current administration, Aguascalientes has had an outstanding performance in terms of local revenues collection and relative control on operating expenditure which explain higher operating margins and favorable liquidity levels. Fitch forecasts that the operating margin will stay around 20% in the next years. Despite a decline of the state's operating balance in 2010, Aguascalientes' management has delivered a prompt recovery showing its capacity to withstand economic downturn. Nonetheless, due to the large proportion of federal transfers in its budget, common to all Mexican states, Aguascalientes is still vulnerable to negative macroeconomic shocks.
Fitch estimates Aguascalientes' direct indebtedness will reach a peak of MXN 3,364 million (24.2% of current revenue) by end-2013. However, provided that no additional debt is contracted by the state, direct debt and other liabilities classified as debt by Fitch will gradually decrease to 20.8% of current revenue by 2015. Moreover, the state's debt burden ratios remain manageable and liquidity levels absorbed a 46.7% direct risk in 2012.
Aguascalientes presents a dynamic economy based on a strong manufacturing sector and particularly on a fast growing automobile industry. In January 2012, Nissan Motors announced a USD 2 billion investment program in the state. In order to further enhance the position of the state as a manufacturing hub, the local administration has committed approximately MXN 1,700 million (US134 million) in order to improve public infrastructure. The state financed 60% of its investment program with two zero-coupon-bond type bank loans while the rest was paid out of budget savings. Nissan's investment plan is expected to have an important positive impact on employment, productivity and on the fiscal revenues of the state.
Regarding the pension liabilities, Aguascalientes stands in a very favorable position compared to Mexican states and other international governments. According to the last actuarial valuation, the state's pension liabilities are fully covered for the next 103 years.
Aguascalientes benefits from its strategic geographical position and an efficient transport network. The economic activity of the state is characterized by its diversity where outstands the manufacturing sector contribution. Moreover, Aguascalientes registers stronger socioeconomic indicators than the national average.
RATING OUTLOOK - STABLE
The Stable Outlook reflects Fitch's expectation of a strong operating performance resulting in healthy debt service ratios.
RATING SENSITIVITIES
A new action over the Mexico's sovereign rating could have a similar impact in Aguascalientes' international rating. An upgrade could occur if Aguascalientes is able to improve its operating margin above 25%, accompanied by direct indebtedness stabilization below 20% of current revenue. Conversely, a negative rating action could result if the operating margin fell far below Fitch's expectation and/or significant rise in Aguascalientes' direct indebtedness.
Additional information is available on www.fitchratings.com.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 14, 2012;
--'International Local and Regional Governments Rating Criteria outside United States', dated April 9, 2013.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
International Local and Regional Governments Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=704438
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=792224
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