Fitch Ratings has affirmed the Mexican municipality of Apodaca's Long-Term (LT) Local Currency (LC) Issuer Default Rating (IDR) at 'BBB-' and National Long-Term Rating (NLTR) at '
The municipality's standalone credit profile (SCP) was downgraded to 'bbb' from 'bbb+'. The LC IDR is capped by
The rating affirmations reflect Fitch's expectations that the Municipality of Apodaca's debt-sustainability metrics will remain satisfactory with a stable risk profile over a five-year rating horizon (2023-2027) based on its good historical financial performance supported by its dynamic economy. Apodaca sustains strong revenue growth prospects for the coming years and significant levels of unrestricted cash despite the noticeable impact of the pandemic on Apodaca's public finances in 2020. Even though operating balances showed a positive trend in 2021-2022, these have not recovered to their pre-pandemic levels. For this reason, Fitch expects actual debt service coverage ratio (ADSCR) to be weaker aligned with Mexican municipalities with a SCP of 'bbb' such as
KEY RATING DRIVERS
Risk Profile: 'Low Midrange'
Fitch assessed Apodaca's risk profile at 'Low Midrange'. This reflects a 'Midrange' assessment for the key risk factors (KRFs) of revenue robustness, expenditure adjustability and sustainability, and liabilities and liquidity robustness and flexibility. Revenue adjustability is assessed as 'Weaker'. The 'Low Midrange' risk profile reflects a moderately high risk of an unexpected weakening of Apodaca's ability to cover its debt service needs over the scenario horizon relative to international peers, either because of revenue falling short of expectations or spending above expectations, or an unanticipated rise in liabilities/debt.
Revenue Robustness: 'Midrange'
This KRF is assessed as 'Midrange' for Apodaca because the operating revenue is closely related to the performance of the national transfers, coming from the sovereign rated 'BBB-', as they have stood for more than half of such operating revenue. Fitch deems these resources as strong, as they present a stable trend and come from a trustworthy source with a supportive framework.
Over 2018-2022 period the growth rate of Apodaca's operating revenue was higher than the real national GDP growth (the operating revenue CAGR in real terms was 5% compared with GDP CAGR of --0.22%), except in 2020 due to the impact of the pandemic on own-source revenues and upper-tier transfers. Property tax revenues and transfers received have demonstrated stability, averaging 69.3% of Apodaca's operating revenue in 2018-2022.
Since 2021 own-source revenues have recovered after the impact of the pandemic, supported by the municipality's economic structure, which is linked to the
Revenue Adjustability: 'Weaker'
Like almost all other Fitch-rated Mexican municipalities, Fitch assesses Apodaca's revenue adjustability at 'Weaker' because the municipality's ability to generate additional revenue in response to economic downturns is limited and it requires political approval from the state congress and local council. The cadastral register is also managed by the state of
Apodaca's own-source revenues performance has been remarkable due to collection strategies coupled with the strong economic growth (new industrial and housing developments). The most important strategies implemented by the municipality are the collection management program through a specialized firm to recover past-due portfolios of the property tax, the reduction of fiscal benefits and the cadastral updating. In 2022, tax revenue increased by 14.3% and federal and state transfers grew around 23% yoy, as variables of the allocation formula such as population growth and own-source revenue collection efficiency were outstanding.
As of
Expenditure Sustainability: 'Midrange'
Apodaca is responsible for moderate counter-cyclical expenditure mostly maintenance, public security, waste collection, whose trend has been significant due to the spending pressure stemming from the demographic growth. Despite this, over the period 2018-2022 Apodaca's expenditure trajectory has been controlled and predictable. During 2018-2022 opex growth (CAGR of 9%) was higher than operating revenue growth (CAGR of 5%) influenced significantly by the sharp plunge of operating revenue in 2020 derived from the extraordinary effect of the pandemic.
After reaching a minimum in 2020, operating balances have recovered steadily in 2021-2022, driven by the operating revenue recovery linked to the ongoing economic growth. Notwithstanding, they still remained below pre-pandemic levels (10.1% vs 20.4% in 2018-2019). In 2022 opex grew by 16% triggered by the reactivation of some municipal activities (mainly maintenance and social events) stopped since 2020 due to the pandemic lockdown and a higher demand of public services relating to population growth (social supports, public security and waste collection). In addition, the municipality had an extraordinary spending related to water supply due to the drought experienced in the
In 2020-2022 Apodaca's operating margins were weaker than the median of Mexican municipalities rated by Fitch and the threshold established by the agency to assess this KRF of 12%. Hence, Fitch will monitor the operating balance behavior, as in the event that the operating margin continues below the threshold, this KRF could be revaluated to weaker.
Expenditure Adjustability: 'Midrange'
Capex has been focused on road infrastructure, paving, rain drainage and street lighting. Apodaca's capex averaged 21.4% of total expenditure between 2018 and 2022, which indicates a moderate level of investment above the median of the Mexican municipalities rated by Fitch (17%). In 2021 and 2022 Apodaca financed capex only with capital revenue and current balance, which showed certain affordability to curb expenses, maintaining its solid liquidity position.
The most inflexible costs derive from staff expenditure and public services such as waste collection and public security. Staff expenditure had been rising over the past few years due to a broader offer of public services, in particular, public security. Since 2021 staff expenditure has been contained and grown slightly below the inflation rate and reached 42.6% of total expenditure in 2022. However, in 2021 and 2022 the capex ratio was lower than 15%, below the median of Mexican municipalities rated by Fitch. Therefore, if this metric continues below such a median structurally, this KRF could be reassessed to weaker.
For 2023, the municipality budgeted MXN453.2 million for capex, which would be an increase of 35.1% yoy. This amount would be financed with capital revenues (mostly from the State), current balance and bank loan proceeds. This could allow the capex ratio to reach around 20%, above the median mentioned.
Liabilities & Liquidity Robustness: 'Midrange'
At YE 2022 Apodaca's direct debt was comprised of two 15-year term bank loans that mature in 2035, with an outstanding balance of MXN389.5 million. Both loans were taken in 2020 under a municipal global credit line of the state of
In
Since 2018 Apodaca has Street lighting modernization contract for MXN600 million due 2028. As per criteria, Fitch considers this financial obligation as 'other Fitch-classified debt' as the private took debt in order to buy LED luminaires and property tax was pledged in a trust to cover project payments. The amount of the street lighting modernization contract at YE 2022 was of MXN305 million.
Apodaca has a reserve fund to cover pension payments that is financed with contributions from the municipality and its employees. The reserve fund amounts to MXN170.6 million as of
Liabilities & Liquidity Flexibility: 'Midrange'
Debt Sustainability: 'aa category'
Apodaca's debt sustainability score of 'aa' is the result of a payback ratio score of 'aaa' (below 2x in 2023-2027 on average) adjusted one category downward because of the weaker score of its ADSCR. We expect ADSCR to be between 2x and 4x in 2025-2027, with a score of 'aa'. Net adjusted debt remains low, despite new borrowings in 2020 and 2023. Regardless, its unrestricted cash is lower than that of other Mexican municipalities with a debt sustainability score of 'aaa'.
Fitch estimates that in a background of high interest rates and inflation, the municipality will maintain low debt metrics and adequate operating balance in the 2023-2027 period, averaging 9.7%. Apodaca's direct debt would increase in line with the municipality's capex performance of the last few years.
Derivation Summary
Apodaca's SCP at 'bbb' reflects a combination of a 'Low Midrange' risk profile and an 'aa' debt sustainability assessment. The SCP also factors in international peer comparison, which includes the city of Brasov (BBB-/Stable) in
National Ratings
Apodaca is comparable with its Mexican peers in the category of '
Key Assumptions
Risk Profile: 'Low Midrange'
Revenue Robustness: 'Midrange'
Revenue Adjustability: 'Weaker'
Expenditure Sustainability: 'Midrange'
Expenditure Adjustability: 'Midrange'
Liabilities and Liquidity Robustness: 'Midrange'
Liabilities and Liquidity Flexibility: 'Midrange'
Debt sustainability: 'aa'
Support (Budget Loans): 'N/A'
Support (
Asymmetric Risk: 'N/A'
Sovereign Cap (LT IDR): '-'
Sovereign Cap (LT LC IDR) 'BBB-'
Sovereign Floor: 'N/A'
Quantitative assumptions - Issuer Specific
Fitch's rating case is a 'through-the-cycle' scenario, which incorporates a combination of revenue, cost and financial risk stresses. It is based on 2018-2022 figures and 2023-2027 projected ratios. The key assumptions for the scenario include:
Operating Revenue CAGR of 7.5% for 2022-2027;
Operating expenditure CAGR of 8.2% for 2022-2027;
Variable Interest rate (TIIE 28) average of 11.8% for 2023-2027;
Adjusted debt considers additional debt authorized for the 2023 budget (MXN65 million) and the acquired in
Issuer Profile
Fitch classifies Apodaca as a Type B local and regional government (LRG), similar to all Mexican LRGs, as it covers annual debt service from cash flow. Apodaca is located in the state of
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
A negative rating action on the sovereign rating would lead to a downgrade of Apodaca's IDR;
The IDR will be downgraded if the SCP is downgraded due to the debt sustainability score deteriorating to 'a', which would result from a debt payback ratio exceeding 5.0x, coupled with a debt service coverage ratio of below 2.0x, under Fitch's rating case;
The NLTR could be downgraded if the SCP is downgraded to 'bbb-', which would result from a payback ratio below 5.0x in tandem with an ADSCR consistently below 1.5x under the rating case scenario. Both of the above-mentioned rating case scenarios could be possible if operating balances will not recover and remain far below their pre-pandemic levels.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
The IDR is constrained by the sovereign rating. Rating action on
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
Public Ratings with Credit Linkage to other ratings
The ratings of the entity are capped by the sovereign ratings.
Best/Worst Case Rating Scenario
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
References for Substantially Material Source Cited as Key Driver Rating
The principal sources of information used in the analysis are described in the Applicable Criteria.
RATING ACTIONS
Entity / Debt
Rating
Prior
Apodaca, Municipality of
LC LT IDR
BBB-
Affirmed
BBB-
Natl LT
Affirmed
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