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/--

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