Mexico’s State Loans Weather Downturn

Mexican states’ and municipalities’ enhanced loans performed well in the economic downturn, says a new surveillance report by Moody’s, which aims to give more transparency on monitoring these instruments. The loans, backed by pledges of transfers from the Mexican government, showed low volatility, despite a 20% contraction in participation transfers, says the report. The report covers the period between Q2 of 2008 and the end of Q1 of 2010. State and municipal debt service coverage (DSC) for these loans was an average of 5.7x during this time, which Moody’s considers a robust level. Reserve levels were also above the minimum stipulated in loan contracts. Participation transfers were only insufficient in the case of one municipal loan in July 2009. Despite reserve funds being drawn down to pay the debt, they were replenished the following month, says Sean Marion, VP at Moody’s and co-author of the report with Rodolfo Torres and Francisco Uriostegui, both associate analysts. Moody’s also rated transactions backed by other federal funds, with loans backed by these revenues performing well, as expected because of the fixed nature of the funds. These funds are not exposed to economic cycles to the same extent as participation transfers, says Marion.