Mexican Government Withholds Funds for Cancun, a Credit Negative

Mexican Government Withholds Funds for Cancun, a Credit Negative

On 11 January and 18 January, the Federal Ministry of Finance (Secretaría de Hacienda y Crédito Público, or SHCP) withheld monthly federal participation transfers earmarked for the Municipality of Benito Juárez (Cancun, B1 review for downgrade). This action is credit negative for the municipality as it immediately creates fiscal pressure and increases credit risk on a municipal loan from state-owned development bank Banco Nacional de Obras y Servicios Públicos, or Banobras (Baa1 stable) that was secured by 100% of Cancun’s participation revenues.
Participation revenues are non-earmarked federal funds transferred every month in two installments to all states and municipalities. In Cancun’s case, the funds are roughly 26% of its total revenue. The SHCP withheld these revenues to Cancun after Fonhapo, a trust of the Mexican government that provides loans to states and municipalities to finance low-income housing, claimed that Cancun had failed to liquidate a loan renegotiated in 2005. The obligation, including past-due interest and penalties, totals MXN112.3 million. Cancun claims that the loan was paid in full in March 2008. Discussions are ongoing between the municipality, Fonhapo and the Federal Ministry of Finance.

The dispute puts Cancun under severe stress for two reasons. First, the municipality would have to immediately cut or postpone part of its current expenditures budget as the portion of the retained participations is roughly 6% of Cancun’s operating revenues.
Second, the participation revenues are pledged to pay debt service on a MXN1.2 billion enhanced loan with Banobras. Cancun structured this enhanced loan under a paying trust, to which it pledged 100% of its participation revenues and established a reserve fund equivalent to 2x monthly debt service coverage. As of last Friday, the trust has not received participation revenues to pay January’s debt service given that SHCP used participation revenues to pay the loan with Fonhapo. If SHCP withholds the participation revenues over the next two months (the amount needed to fully pay Fonhapo’s loan), the reserve fund will be depleted, significantly increasing Cancun’s risk of default.
Although discussions continue, failure to reach an agreement with Fonhapo would force Cancun to pay debt service to the trust with own-source revenues in order to prevent missing a payment in March, when the third debt service payment of 2012 will take place.