Fitch Affirms State of Aguascalientes' Ratings; Outlook Stable

MONTERREY, Mexico--(BUSINESS WIRE)-- Fitch Ratings has affirmed Aguascalientes' ratings as follows:

--Long-Term Local Currency Issuer Default Ratings (IDR) at 'BBB+';

--Long-Term National Rating at 'AA+(mex)'.

The Rating Outlook is Stable.

The rating action reflects Fitch's expectation that Aguascalientes will maintain budgetary discipline and strong operating performance resulting in healthy debt service ratios.

KEY RATING DRIVERS

The rating action reflects Aguascalientes' solid operating performance, resulting from strengthening fiscal policies and ongoing monitoring of spending, as well as low leverage and high sustainability linked to its conservative debt policy. It also considers the dynamism of the local economy, the fact that state pension liabilities are fully covered and the strengthening of the corporate governance of the institute responsible such liabilities. The high dependence on federal revenues, a common feature of the states in Mexico, constrains the rating.

At March 31, 2016, the direct debt of Aguascalientes was MXN2.122 billion (USD117 million), of which MXN2.078 billion were signed with commercial banks maturing in 2031. The remainder of the balance consists of two loans maturing in November 2016. Moreover, the entity does not have short-term loans or guaranteed financing. Considering that no additional debt is contracted by the state, direct debt and other liabilities classified as debt by Fitch will gradually decrease. Moreover, the state's debt burden ratios remain manageable and liquidity levels absorbed most of the debt.

Additionally, the state has hired two zero coupon bond type bank loans with the national development bank whose credit balance at March was MXN879.8 million. The resources were used in public infrastructure related to an investment in the automotive industry that positively impacted the region. According to its operation, Aguascalientes is responsible for payment of interest and principal will be covered in a single payment at maturity (20 years), with redemption of the bond. For this reason, Fitch does not consider the balance of these loans in the level of leverage. Meanwhile, interest payments are computed in the indicator of debt service.

The current administration has had an outstanding performance in terms of local revenue collection, relative control of operating expenditure and definition of mechanisms against possible contingencies, which explains higher generation of free cash flow from operations (FCFO, operating margin) and favorable liquidity levels. In the last four years, its operating balances have been above MXN1.000 Billion, the increase in its operating balances is reflected in higher investments levels. According to the budget for 2016 and financial statements to March 2016, Fitch forecasts that FCFO will stay around historical levels.

Aguascalientes has presented a strong liquidity position in 2010-2015. At Dec. 31, 2015, the state registered a liquidity balance equal to 10.7% of total revenues; also its account payables present a controlled evolution, with no use of short-term credit lines.

Regarding 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 112 years. Additionally, the entity makes annual actuarial studies, works to strengthen the corporate governance of the institute responsible for the payment of pension and changed the regulatory framework to strengthen the sustainability of the fund. By decree the institute created Committees of Investment and Risk with independent consultants, also modified its investment policies.

The provision of water services is the responsibility of decentralized agencies at the municipal level, so this is not a contingency for state finances. Aguascalientes has very good coverage of drinking water and wastewater, ranking among the top nationally. Aguascalientes' program of investment includes improving the availability of water over the medium term.

The current administration, took office in December 2010 and its term will end in November 2016. Elections will be held the next June to define the next state administration. Fitch will monitor the process of transition, according past processes it is not expected significant changes in financial and debt policies.

Aguascalientes benefits from its strategic geographical position and an efficient transport network. The state has a dynamic economy with high generation of jobs and is attractive for foreign investment. According to the administration, economic development will impact in the next few years. The economy is based on a strong manufacturing sector, particularly on a fast-growing automobile industry. In the last two years, Nissan Motors and Daimler announced a USD3.3 billion investment program in the state, which are in progress and is expected to start operations entirely in 2017. Moreover, Aguascalientes registers stronger socioeconomic indicators than the national average.

RATING SENSITIVITIES

An upgrade of the sovereign rating, along with Aguascalientes' solid operating performance, could trigger a positive rating action over its international rating. The main factors that could individually or collectively, lead to a negative rating action include: a significant debt increase (short-term and/or long-term), and a substantial deterioration in its operating margins and cash levels.

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1004845

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004845

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160520005674/en/

Fitch Ratings
Primary Analyst
Ileana Guajardo
Director
+52 81 8399 9100
Fitch Mexico S.A. de C.V.
Prol. Alfonso Reyes 2612
Monterrey, N.L. Mexico
or
Secondary Analyst
Natalia Etienne
Analyst
+52 81 8399 9100
or
Committee Chairperson
Fernando Mayorga
Managing Director
+34 93 323 8407
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
[email protected]

Source: Fitch Ratings

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