OREANDA-NEWS. June 30, 2015. Fitch Ratings has affirmed State of Guanajuato's ratings as follows:

--Long-term local currency Issuer Default Ratings (IDR) at 'BBB+';
--Long-term National Rating at 'AA+(mex)'.

The Rating Outlook is Stable.

The rating action reflects Guanajuato's high operating margins and its conservative debt policy. It also considers Fitch's expectation that the state will continue with its budgetary discipline.

KEY RATING DRIVERS
Guanajuato's rating reflects its solid operating performance resulting from strengthening fiscal policies and control of expenditure, as well as low leverage and sustainability. It also considers the dynamism of the local economy and the fact that the state pension liabilities are fully covered. The high dependence on federal revenues, a common feature of the states in Mexico, constrains the rating.

At March 30, 2015, the direct debt of Guanajuato was MXN5.572 billion (USD355 million), the debt was signed with both local commercial banks and development bank, the entity does not have short-term loans. The state's debt burden ratios remain manageable and liquidity levels absorbed most of the debt. The administration has not defined plans for additional debt. In the next years according with its conservative debt policy Fitch expects that Guanajuato will maintain low leverage and sustainability levels.

Guanajuato has had an outstanding performance in its local revenue collection and generation of operating revenues, also presents an important control of operating expenditure. This was the result of its growing economy, the revenues policies implemented and its fiscal discipline. Although state revenues recorded a high dynamism in the last five years, they represent less than 9% of total revenues, reflecting a high dependence on federal revenues.

The state presents higher generation of free cash flow from operations (FCFO) and favorable liquidity levels. In the last three years, Guanajuato generated an averaged of FCFO above of 25% of current revenue. As a result, capital expenditure has increased in the period. In 2014, Guanajuato invested MXN3.932 billion with own resources. Considering federal revenues, the total capital expenditure was MXN13.857 billion.

Guanajuato is considered the seventh economy of the country, its GDP per capita represents 83% of the national average. The state has a privileged geographical position and a diversified and dynamic economy with high generation of jobs and is attractive for foreign investment. It also stands out by its contribution to the manufacturing sector; especially in the production of machinery and equipment, petroleum by-products, and the food industry.

Regarding pension liabilities, Guanajuato stands in a very favorable position compared to Mexican states and other international governments. The Social Services Institute of Guanajuato (ISSEG) is responsible for the state's pension liabilities. In 2013, ISSEG held a reform to strengthen the pension system in the long term, in which the results were an increase in the contribution for the next five years, the pension will be equivalent to the average of the last five wages, and the permanency plan was abolished. According to the last actuarial valuation performed with information to December 2013, the state's pension liabilities are fully covered until 2043 or 2092 (yield or 3% or 5% respectively).

On the other hand, drinking water supply, sewerage and treatment of wastewater services in the state of Guanajuato, as well as the maintenance of such distribution networks, are under the responsibility of the decentralized operating water bodies in each municipality. Nevertheless, the state makes investments, mainly focused on wastewater treatment and drinking water works through the State Water Commission of Guanajuato (CEAG). Actually, the state has requirements related to water infrastructure principally in water supply and treatment of wastewater.

RATING SENSITIVITIES
An upgrade of the sovereign rating, accompanied by Guanajuato's solid operating performance, could trigger a positive rating action.

Fitch may take a negative rating action if FCFO fell far below expectations and/or if there were a significant rise in Guanajuato's direct indebtedness.