MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has affirmed the State of Guanajuato, Mexico's ratings as follows:
--Long-Term Local Currency Issuer Default Rating (IDR) at 'BBB+';
--Long-Term National Rating at 'AA+(mex)'.
The Rating Outlook is Stable.
The rating action reflects Guanajuato's strong operating performance and its conservative debt policy. It also considers Fitch's expectation that the state will continue with its budgetary discipline.
KEY RATING DRIVERS
Guanajuato's rating reflects its solid operating performance, as well as low leverage and high sustainability. It also considers the state's fiscal policies, the dynamism of the local economy, strong liquidity, and the fact that the state pension liabilities are covered for the forseeable future. The high dependence on federal revenues, a common feature of the states in Mexico, constrains the rating.
Guanajuato presents low leverage and high sustainability which is linked to its conservative debt policy. At April 30, 2016, the direct debt of Guanajuato was MXN4.513 billion (USD242 million), all debt signed with both local commercial banks and the development bank. All credits are using federal revenues as collateral.
The state has the authorization to take on debt for up to MXN4,240 million with maturity of 15 years, which can be contracted until June 2018. In April 2016 Guanajuato signed a loan for MXN2,152 million with a commercial bank with a 15-year maturity. According to the state investment plan, the rest of the debt authorization will be used in the next two years. Fitch expects Guanajuato will maintain debt burden ratios manageable over the next few years.
Regarding other liabilities, guaranteed debt is low (MXN740 million). Guanajuato has recorded the El Zapotillo aqueduct project in which the federal government participates, the state, the decentralized body of water of Leon (SAPAL) and a private third party. Beginning at the end of 2017, it is estimated that the state will be responsible for MXN127.6 million annually for a period of 22 years.
Guanajuato's local revenue collection and operating revenue generation has been outstanding, the result of its growing economy, revenue policies implemented, and its fiscal discipline. Although state revenues have been strong in the last five years, they represent less than 8% of total revenues, reflecting a high dependence on federal revenues.
In 2015 operational expenditure showed an important increase, explained by higher expenditures in education, health, and current transfers. Despite the increase, the growth in operating revenues has helped the state maintain good free cash flow from operations (FCFO), which covers the expenditure with its high liquidity levels.
In the last five years, Guanajuato's operating balances have been above MXN5 billion; as a result, capex has also increased. In 2015, Guanajuato invested MXN6.8 billion of its own resources. Considering federal revenues, total capex was above MXN16 billion.
For 2016 and considering financial information, we estimate that state's operating balance will not exceed that of 2015. However, a significant decrease is not expected; operating balance will be supported by cash and debt.
Guanajuato had strong liquidity in 2010-2015. At Dec. 31, 2015, the state registered a liquidity balance equal to 17.3% of total revenues, which absorbed most of the debt. Also its account payables remain at low levels, with no use of short-term credit lines.
Regarding pension liabilities, Guanajuato stands in a very favorable position compared to other Mexican states and other international governments. The Social Services Institute of Guanajuato (ISSEG) is responsible for the state's pension liabilities. In 2013, ISSEG implemented reforms to strengthen the pension system for the long term. According to the last actuarial valuation performed by Valuaciones Actuariales del Norte, the state's pension liabilities are fully covered until 2042 or 2081 (based on a yield of 3% or 5%, respectively).
On the other hand, drinking water supply, sewerage and treatment of wastewater services in the state of Guanajuato, as well as the maintenance of such distribution networks, are under the responsibility of the decentralized operating water bodies in each municipality. Nevertheless, the state makes investments, mainly focused on wastewater treatment and drinking water works, through the State Water Commission of Guanajuato (CEAG). The state has requirements to help support water infrastructure principally in water supply and treatment of wastewater.
Guanajuato is considered the seventh of the states as far as its economy is concerned, and its GDP per capita represents 85% of the national average. The state enjoys a privileged geographical position - centrally located and near to Mexico City - and a diversified and dynamic economy with high generation of jobs and is attractive for foreign investment. It also stands out by its contribution to the manufacturing sector, particularly in the automotive, food and chemical industries.
RATING SENSITIVITIES
An upgrade of the sovereign rating, accompanied by Guanajuato's solid operating performance, could trigger a positive rating action over its international rating.
Fitch could downgrade the rating action if FCFO fell far below expectations and/or there were a significant rise in Guanajuato's direct indebtedness.
Additional information is available on www.fitchratings.com
Applicable Criteria
International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878660
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