Fitch Ratings expects to assign the following rating to the proposed issuance of notes by the Maquinaria Especializada MXO Trust Agreement No. F/00762, a Mexican trust created by Maquinaria Especializada MXO, S.A. de C.V. (Geo Maquinaria) and The Bank of New York Mellon, S.A. Institucion de Banca Multiple:
--$160,000,000 notes due 2020 'BB-sf'; Outlook Stable.
Fitch's rating addresses the likelihood of timely payment of interest and ultimate payment of principal by legal final maturity, expected in 2020. The transaction will have a 10-year tenor and is fully amortizing over the term. The interest rate will be fixed.
The transaction's rating is directly linked to the senior unsecured rating of Coporacion Geo (Geo Corp.) (Local Currency Issuer Default Rating [IDR] 'B+'; Foreign Currency IDR 'B+'/'BBB+[mex]'); Unsecured rating 'BB-') as Geo Corp. is responsible for all payments under an unconditional and irrevocable service agreement (SA) as well as any termination fees in the event of default and/or termination of the agreement. The expected rating of 'BB-sf' for the proposed notes reflects Fitch's current assessment of Geo Corp.'s outstanding unsecured debt obligations. In the event of a bankruptcy filing by Geo Corp., Fitch expects that the noteholders under the proposed issuance will be in a pari-passu position with other senior unsecured creditors via a claim against the termination fee required to be paid by Geo Corp. under the terms of the SA. For more details related to Fitch's rating criteria applied, please see the related pre-sale report 'Maquinaria Especializada Trust Agreement No. F/00762 $160 Million Notes due 2020,' Oct. 25, 2010.
Repayment for the proposed issuance of notes will be supported by an irrevocable and unconditional quarterly service fee paid by Geo Corp during a 10-year period under the terms of the SA entered into by Geo Corp., various Geo Corp. subsidiaries and Geo Maquinaria in exchange for the machinery utilization services for Geo Corp. and its subsidiaries. Upon execution of the agreement, which will be co-terminus with the transaction, Geo Maquinaria will transfer the SA and the rights to all collections therein, the machinery, and insurance policies to the issuer for inclusion in the Trust Estate. Per the terms of the SA, Geo Corp. or the issuer may terminate the agreement under certain circumstances regarding breaches of service, prior to its expiration date. In the event of a termination by either party, Geo Corp.'s sole remedy is to pay the termination fee which will be at least the face value of the notes at the time of termination. Funds held in the reserve account will be available for any unpaid expenses then due and payable before releasing any funds to Geo Corp.
Additional credit support is provided in the form of the sale of Geo Corp.'s essential construction equipment to the trust, with an appraised value of $64.6 million as of June 2010. In the event of a default, the trust may liquidate this machinery and apply the proceeds to pay down the debt balance. This equipment is considered essential for Geo Corp. to conduct its day to day operations and its inclusion in the trust provides a strong incentive for Geo Corp. to honor its obligations under the Service Agreement.
Geo Corp. maintains an important market share position within the very competitive and fragmented Mexican homebuilding sector. During 2009, the company sold 56,537 homes. Through the first six months of 2010, Geo has titled 25,032 houses, an increase from 23,041 during the similar period in 2009.
In the next few years, Fitch expects slower revenue growth rates. Operating margins should also decline as the company migrates toward the lower income housing segment, a part of the market that is becoming increasingly competitive. Between 2003 and 2009 the number of homes sold by Geo Corp. increased from 29,520 to 56,537, while revenues and operating income registered a compounded annual growth rate of 14.5% and 15.4%, respectively. EBITDA margins improved to 23% from 22.6% during the same period. Fitch expects Geo Corp.'s EBITDA margins to range between 21% to 23% during 2010, considering a more balanced sales strategy that is increasingly focused on the low-income segment.
Fitch expects to rate the $160 million notes due in 2020 'BB-sf'. Final rating assignment is subject to completion of legal documentation review and analysis.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Global Structured
Finance Rating Criteria' (Sept. 30, 2009);
--'Fitch Rates Geo's
US$250MM Proposed Sr. Notes 'BB-/RR3' (June 24, 2010);
--'Maquinaria
Especializada Trust Agreement No. F/00762 $160 Million Notes due 2020 '
Oct. 25, 2010 Presale Report (Oct. 25, 2010).
Applicable Criteria and Related Research: Maquinaria Especializada MXO
Trust Agreement No. F/00762 $160 Million Notes Due 2020 (MX ABS)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=567966
Global Structured Finance Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547326
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