SUB-SOVEREIGNISSUER IN-DEPTH 17 SEPTEMBER 2015KEY METRICS:Merida, Municipality of 2012 2013 2014Gross Operating Margin / Operating Revenues8.5% 11.7% 4.5%Net Direct and Indirect Debt / Operating Revenues2.2% 8.8% 7.5%Net Working Capital / Total Expenditures4.1% 24.4% 11.6%Source: Moody's, Merida's financial statementsMeridaMerida's Streetlight Lawsuit Could Cost 9.9% of Operating Revenues, a Credit Negative¯ On 14 September, Moody's affirmed the Municipality of Merida's Aa3.mx (Mexico National Scale) and Baa3 (Global Scale, local currency) ratings, and revised the outlook to negative from stable. The change in the outlook reflects a potential MXN203 million ($12 million) payment, equivalent to 9.9% of operating revenues, that Merida would be liable for if it loses a lawsuit over a disputed streetlighting contract. It is also based on our expectation that the municipality's gross operating margins will deteriorate again in 2015. Our affirmation of Merida's ratings reflects its relatively low debt levels, and its still strong liquidity position compared to national peers.¯ Merida would have to pay MXN203 million in the event of a negative lawsuit verdict. In August 2015, the State Court ruled that Merida should pay compensation of MXN203 million to streetlighting contractor AB&C Leasing. Merida has appealed against that decision to the Federal Court, which is expected to issue a final ruling in late 2015. If the court decides against the municipality, it would have to fund the compensation payment either by borrowing, or from its own resources. If it pursued the latter option, its net working capital would deteriorate.¯ Operating expenditures evolution to weigh on Merida's margins in 2015. The increase in expenditures related to personnel and general services and municipal elections held in June 2015 could reduce Merida's gross operating margins for the year. This would mark a second consecutive year of margin erosion for the municipality, which was forced to cover the cost of installing new streetlights in 2014 after terminating its contract with AB&C Leasing the previous year. This additional expenditure weighed on the municipality's gross operating balance, and put pressure on its investment grade credit profile.Merida would have to pay out MXN203 million in the event of a negative lawsuit verdict In March 2011, the municipality of Merida signed a contract with AB&C Leasing de Mexico to improve street lighting in the city. The project involved the replacement of 84,090 street lights with more efficient models that used 20% less energy. The objective was to generate operating savings, strengthening the municipality's gross operating margins (operating revenues minus operating expenditures). The monthly payment to AB&C Leasing was approximately MXN7 million.MOODY'S INVESTORS SERVICE SUB-SOVEREIGNThis publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the rating...
