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Moody’s downgrade bruises new administration

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Fallout from a canceled contract has reflected in a Moody's downgrade for Mérida.
Fallout from a canceled contract has reflected in a Moody’s downgrade for Mérida.

Mérida, Yucatán — Bad news for the administration that took office Sept. 1.

Following the verdict of a crippling lawsuit, Moody’s de Mexico changed the outlook on the Municipality of Mérida’s issuer ratings from stable to negative. Issuer ratings judge the city’s creditworthiness.

The deterioration reflects partially that the municipality had to invest an additional amount to replace 72,000 faulty streetlights. Then, the city lost a huge lawsuit with ABC Leasing, after canceling a contract to install LED streetlights. In August, the court ordered the city to pay 203 million pesos to ABC. The payout, in U.S. dollars about $12 million, is equal to 9.9% of the city’s operating revenues. The city has yet to decide whether to appeal to a federal court or pay the judgment.

At the same time, Moody’s affirmed the municipality’s Aa3.mx (Mexico National Scale) and Baa3 (Global Scale, local currency) ratings. This reflects Merida still low net direct and indirect debt levels and its strong liquidity position of 11.6% of total expenditures at the end of 2014, a strong level compared to national peers.

What could change the rating up or down

The strengthening of gross operating margins along with the maintenance of low debt levels and a solid liquidity position could stabilize Moody’s outlook.

But if operating margins deteriorate further, and if the lawsuit weakens the city’s liquidity or debt levels, Moody’s warns their rating could become even more adverse.

Source: Moody’s Investment Services

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