MONTERREY, Mexico & NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB-' Long-term foreign currency and the Long-term local currency rating of the Metropolitan Municipality of Lima (MML), Peru. The Rating Outlook remains Positive.
KEY RATING DRIVERS
The affirmations reflect the importance of MML in the national context as it is the economic and political capital of the country, and provides the high and dynamic collection of municipal taxes which support high-margin operations. However, the ratings also factor in the significant investment plans of MML, a significant part of which is expected to be debt funded, and which will add pressure to current expenditure.
The Rating Outlook reflects that despite an increase in debt burden, the strong fiscal position of MML and high operating margins will still result in sound debt metrics comparable with other entities in the 'BBB' category.
MML has the status of a special region, with 43 districts within its jurisdiction. Lima accounts for around 48% of Peru's gross domestic product (GDP) and for around 30% of the total population of the country. Population growth has generated an increasing tax base, which together with fiscal policies implemented, has led to a significant increase in municipal income, among which the property transfer tax ('alcabala') stands out. Also an important factor in increased revenue generation has been the efforts by the administration to reduce and collect tax arrears.
Apart from taxes, Lima has also been collecting toll road payments, but starting from 2013, this revenue source will now be transferred to new concessionaires of the roads, who will be responsible for their maintenance and operations. However, though this will represent a significant reduction in revenues going forward, as toll receipts represented around 24% of adjusted operating revenues (excluding the property transfer tax collected on behalf of the districts) in 2012, it will also lead to operating cost savings.
In general, the budgetary performance of MML has registered strong operating margins, averaging 50% in 2008-2011. The decline in margins in 2012 to 41% was largely attributable to the significant increase in staff expenditure following a legal ruling. Nevertheless, the still strong margins reflect the capital expenditure responsibilities of the MML. There will be an increase in operating expenditure from the planned capital expenditure undertaken. However, Fitch's base case scenario still projects comfortable operating margins, averaging more than 30% in the next three years.
Lima's responsibilities are largely focused on capital expenditure. Given the strong demographic growth, capital expenditure has been significant, particularly in the past three fiscal years. For the future, the present administration plans capital expenditure of more than PEN1.2 billion in 2013-2014. The investment includes a large number of projects such as improving and expanding the main public transport routes, parks, hills and neighborhoods, some roads, the coastal zone project (Costa Verde), and the large wholesale market (EMMSA), among others. Fitch does not expect the government recall referendum in Lima to impede the capital expenditure program, as most of the programs have already been approved and financed.
Regarding debt, MML had PEN326 million, as of June 30, 2013. This past Aug. 9, Fitch assigned MML's proposed up to PEN593 million bond a 'BBB-(EXP)' long-term local currency rating. The bond proceeds will be used for financing capital expenditures and for repaying domestic borrowing.
Debt as a proportion of current revenues will increase from the current 22% to about 58% by the end of 2013. This debt level is manageable, particularly given the expected growth in the tax base. Presently all debt servicing has priority payment through formal and administrative trust deeds, which is a positive rating factor. The agency understands that most of the trust agreement (liens) will be canceled following the issue of the bond. Fitch will monitor the development of this financing plan.
MML has a significant number of public companies but these do not represent a significant burden to the municipality, either because they are self-financing or because of their limited budget. However, Fitch will monitor their financial situation to ensure that they maintain their financial profiles in line with levels registered in recent years.
KEY RATING ASSUMPTIONS AND SENSITIVITIES
A positive rating action would happen if the growing trend in Lima's income is maintained, combined with controlled budgetary expenditure and favorable terms and conditions of debt. Also, an upgrade of Fitch's sovereign rating, accompanied by Lima's solid operating performance, could trigger a positive rating action.
The current Rating Outlook is Positive; consequently, Fitch's sensitivity analysis does not foresee any developments that would lead to a rating downgrade. However, future developments that may, individually or collectively, lead to a stabilization of the Outlook include a significant deterioration in the budgetary performance caused by a large increase in operational expenditure and/or by a decrease in revenue. So would an increase in its debt burden (long or short term) beyond Fitch's projections.
Additional information is available at 'www.fitchratings.com'.
Applicable criteria and related research:
--'Tax-Supported Rating Criteria' dated Aug. 14, 2012;
--'International Local and Regional Governments Rating Criteria, Outside the 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=801644
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