Rating Action: Moody’s downgrades the issuer ratings of Aguas del Municipio de Durango to Ba3/Baa1.mx from Ba2/A2.mx and maintains a negative outlook
Mexico, JAN. 2021 — Moody’s de Mexico S.A. de C.V. (“Moody’s”) downgraded the issuer ratings for Aguas del Municipio de Durango (AMD) to Ba3/Baa1.mx from Ba2/A2.mx and maintained a negative outlook.
RATINGS RATIONALE
The rating action to downgrade AMD’s issuer ratings and to maintain the negative outlook follows the downgrade of the Municipality of Durango’s issuer ratings to Ba3/Baa1.mx and the maintenance of the negative outlook. For more details, please refer to Moody’s press release: https://www.moodys.com/research/–PR_436364.
AMD has strong operating and financial linkages with the Municipality of Durango as it has a clear public mandate to provide essential water and sewage services. Long-term debt of AMD is guaranteed by the municipality, and a potential default would greatly damage the support provider’s reputation. Moody’s believes that the municipality of Durango would act in a timely manner to address any liquidity pressures that the water company may face. As such the credit quality of AMD reflects that of the Municipality of Durango.
AMD’s liquidity has been significantly low, registering an average of 0.07 times (x) the cash to current liabilities from 2017-19. To cover the liquidity needs, the entity has been making a recurrent use of short-term debt since 2017 for MXN 12 million. Moody’s expects that AMD will continue to rely in short-term debt in 2021, exerting additional negative pressure in its liquidity, the one we project to be of 0.03x the cash to current liabilities in 2020-21, given the higher financing requirements expected. The company’s total debt is low at 7.6% of total revenues, and Moody’s expects it will maintain similar levels in 2020-21, around 6% of total revenues.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook for AMD reflects the negative outlook assigned to its supporting government.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Environmental considerations are not material to AMD’s credit profile. AMD is exposed to climatic phenomena such as prolonged periods of drought; however, these risks are not material for the ratings given the strategic role that the utility plays and the support from the Municipality of Durango.
Social risks are not material to AMD’s credit profile, given the strategic role that the water company plays and the support from the Municipality of Durango. The water company is responsible for the basic service of supplying drinking water and sewerage and sanitation, and receives financial support from the municipality of Durango. Additionally, we see the coronavirus pandemic as a social risk due to the substantial implications for health and public safety and the risk of a further spread of the outbreak in the municipality.
Corporate governance considerations are material to AMD’s credit profile, and capture the close institutional, operational and financial ties between the water company and the municipality of Durango, in conjunction with weak financial results and a tight liquidity reflecting weaker AMD’s financial flexibility.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the strong linkages between the AMD and its support provider, and upgrade or downgrade of the Municipality of Durango would likely lead to an upgrade or downgrade of the water utility. Additionally, given the weakening liquidity of Durango, should evidence arise that it will be unable to support AMD in a period of acute liquidity pressure, the strength of the relationship between Durango and AMD could weaken. This could result in a decoupling of AMD’s rating from that of Durango.
The methodologies used in these ratings were Regional and Local Governments published in January 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1091595, and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com.mx for a copy of these methodologies.
The period of time covered in the financial information used to determine Aguas del Municipio de Durango’s rating is between 01 January 2015 and 31 December 2019 (source: Aguas del Municipio de Durango).
Moody’s National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody’s global scale credit ratings in that they are not globally comparable with the full universe of Moody’s rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a “.nn” country modifier signifying the relevant country, as in “.za” for South Africa.
For further information on Moody’s approach to national scale credit ratings, please refer to Moody’s Credit rating Methodology published in May 2016 entitled “Mapping National Scale Ratings from Global Scale Ratings”. While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1216309
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