TEXT-S&P assigns Queretaro, Mexico 'BBB-' global rating
Overview -- The Mexican city of Queretaro's total debt and debt service are low by national and international standards, and our base-case scenario contemplates strong budgetary performance through 2013. -- Among cities in the same rating category, Queretaro is noted for its adequate administrative practices, transparency, and financial planning. -- We are assigning our 'BBB-' global scale and affirming our 'mxAA+' national scale credit ratings on the city. -- The stable outlook reflects our expectation that the city will maintain its strong financial metrics, prudent and transparent financial policy, and strong liquidity position relative to its debt obligations. Rating Action On March 5, 2012, Standard & Poor's Ratings Services assigned its 'BBB-' global scale credit rating to the City of Queretaro, Mexico. At the same time, we affirmed our 'mxAA+' national scale long-term credit rating on the city. The outlook on both scales is stable. Rationale Queretaro has the highest national scale credit rating among Mexican cities that Standard & Poor's rates. It is also the first municipality in Mexico and the second in Latin America that we rate as investment-grade. The ratings on the city reflect its low debt level, which compares positively with its rated peers in Argentina, Brazil, and Colombia. They also reflect its strong budgetary performance during the past three years, which we expect it will maintain in 2012 and 2013, according to our base-case scenario. Other supporting factors are its sound management practices, which mirror its prudent liquidity policy during the past two years, and its economy that is among the most dynamic in the country. Relatively low financial flexibility on the revenue side compared with international peers', even though favorable compared with national peers', limits the ratings. The lack of consistency of the city's adequate liquidity policy through political cycles, in our opinion, and no additional reforms to its pension system could also limit the ratings in the coming years. Queretaro's debt is below the average of other local governments in the world that Standard & Poor's rates. The city's prudent debt management results in both a decline in its debt during the past three years and an absence of short-term debt. Queretaro's debt indicators compare positively with national and international standards and mirror those of peers such as the City of Moscow (BBB/Stable/--) or Bogota (BBB-/Stable/--), whose debts are about 25% of operating revenues. As of Dec. 31, 2011, Queretaro's municipal debt was MXN651.2 million--about 27% of its discretionary revenues (revenues available for debt repayment)--while its debt service (principal and interest payments) was a low 6%. If it requires no additional borrowing in 2012, its debt and debt service will be low, at about 20% and 5% of its discretionary revenues, respectively, at the end of this year. The city's total debt comprises commercial bank loans and is backed by 61% of its federal revenue-sharing transfers (participaciones) and it is paid through a trust. Our base-case scenario assumes that the city's debt requirements will be low, if any, in 2012 and 2013, which will help it maintain a prudent and long-term-oriented debt policy. Pension liabilities don't represent a significant burden to the city during the next three years. As of the end of 2011, they were a relatively low 1.8% of its operating expenses, and they will likely stay at less than 4% at least until 2014. In our opinion, the city has the ability to enhance its pension fund to prevent pressures in the long term. As of January 2012, the pension fund, created in 2008, had increased to MXN3.3 million. Queretaro's budgetary performance is strong and stable, in our view. At the end of 2011, Queretaro had a surplus of MXN638 million, about 25.3% of its operating revenues, and after capital expenditures, 4% of total revenues. In the past three years, Queretaro's surplus after capital expenditures of 6.46% on average compared favorably with those of Bogota, at 1.13%, and the City of Leon (mxAA/Stable/--) in Mexico, at 1.52%. Based on the city's efficient tax collection and good expenditure controls, we expect that by the end of 2012 and 2013, the city will generate surpluses of about 25% of its operating revenues and some surpluses after capital expenditures, given that we don't expect it to increase its capital expenditures considerably. The current administration is noted for solid administrative and financial practices that have remained even during political transitions. In addition to maintaining an outstanding transparency policy and the prudent debt policy in recent years, Queretaro has strengthened its tax collection. Revenues from the property tax were up 10% in 2011 compared with 2010. Also, the municipality continues to strengthen its liquidity, which mitigates the financial pressures that commonly arise at the end of every fiscal year. We expect that the present administration, which ends in September 2012, will carry out a smooth political transition process following the election. In our opinion, the consistency in the city's current administrative practices will be critical to maintaining its current ratings in the coming years. The city's economy is a positive rating factor because it creates its strong tax base. With 801,940 people, the city holds 44% of the total population of the State of Queretaro Arteaga (mxAA/Stable/--). Also, 54% of the state's exporting companies reside in the city. The strength of the city's economy, where the service, basic-industry, and manufacturing sectors account for 72% of economic activity, results in a GDP per capita that's among the highest in the country ($14,000, according to our own estimates). Among Mexican municipalities, Queretaro is noted as one of the most competitive, with a high growth potential, and this will likely continue to benefit its tax base. Regarding revenues, the city's financial flexibility is high compared with its national peers'. During the past five years, Queretaro's modifiable revenues (taxes, fines and fees, fees for services, and interest income) averaged 51% of its operating revenues, comparing favorably with the 39% average among Mexican municipalities in the 'mxAA' national scale rating category. It also compares favorably with that of cities such as Moscow, whose modifiable revenues accounted for almost 10% of its operating revenues in 2010. However, Queretaro's ratio was still lower than that of capitals in Latin America, such as Bogota, whose modifiable revenues are close to 70% of its operating revenues. The city's spending flexibility is nevertheless more limited, in our opinion, because its growth will require constant infrastructure spending in the coming years. Still, we believe Queretaro will continue to fund its capital expenditures mainly through modifiable revenues during the next three years, and could reduce them in case of unexpected financial pressures. As of the end of 2011, its capital expenditures of MXN1.06 billion represented 36% of its total expenditures, a percentage that we expect to remain at a similar level through year-end 2012. Liquidity As of the end of 2011, the city of Queretaro's cash reserves totaled MXN423 million, of which MXN263 million was unrestricted. This unrestricted amount compared favorably to short-term payables of MXN33 million and estimated debt service for 2012 of about MXN138 million. This year, the municipality created a fund of about MXN200 million to guarantee the payment of year-end bonuses; therefore, we don't expect the city to face liquidity pressures at year-end. Although it has no committed credit lines as part of its liquidity, we believe it would have timely access to external financing sources if needed. Assuming strong budgetary performance, we don't expect the municipality will use short-term or working capital credit facilities in 2012 and 2013. Outlook The outlook is stable, reflecting our expectation that the municipality will maintain surpluses of about 25% of operating revenues and a surplus after capital expenditures in 2012 and 2013. We also expect that Queretaro will maintain a prudent debt policy and strong liquidity relative to its financial obligations. In our opinion, significant deficits after capital expenditures (consistently above 10% of operating revenues) that erode the city's liquidity and increase its debt could pressure the ratings downward. Related Criteria and Research Methodology For Rating International Local And Regional Governments, Sept. 20, 2010 Ratings List Rating Assigned City of Queretaro Corporate credit rating Global scale BBB-/Stable/-- Rating Affirmed City of Queretaro Corporate credit rating National scale mxAA+/Stable/-- Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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