CROSS-SECTOR

SECTOR IN-DEPTH Cross-Sector – Mexico

20 March 2020
TABLE OF CONTENTS
Coronavirus outbreak will strain
Mexican tourism in 2020
Coronavirus adds further stress to
prevailing negative conditions
Peso’s depreciation adds further
stress for companies with foreign-
exchange exposure
Mexico airports have track record of
resiliency under stress
Moody’s related publications
Coronavirus outbreak adds to prevailing
risks for crucial tourism sector
» Amid the rapid and widening global coronavirus outbreak, the airline and lodging
sectors face the greatest exposure to shocks in demand and in the capital
2
markets. Mexico generates nearly 9% of its GDP from tourism. Our analysis assumes
3 severe cuts in passenger traffic over at least the next three months, including some
periods when fleets are partially or mostly grounded. Industry capacity will be cut in the
second quarter of 2020, in some instances, more than 75% compared with the second
4
quarter of 2019. As a largely temporary phenomenon, the coronavirus’s effect on the
5 credit quality of rated lodging companies will depend on how well their liquidity allows
6 them to endure the lowest part of the economic cycle.

» Mexico’s airline and lodging companies already had a difficult 2019, with weaker-
than-anticipated operating results for Playa Resorts (Caa1 negative), Grupo
Analyst Contacts Posadas (B2 review for downgrade) and Grupo Aeroméxico (B2 review for
Sandra Beltran +52.55.1253.5718 downgrade). Mexico’s tourism sector had already been struggling with increasingly
VP- Senior Analyst
difficult conditions before the outbreak, including decelerating economic growth in both
sandra.beltran@moodys.com
Mexico and the US. Without adequate promotion from the federal government, Mexico’s
Adrian Garza, CFA +52.55.1253.5709
tourism sector is weakly positioned to recover rapidly from the coronavirus outbreak, and
VP-Senior Analyst
adrianjavier.garza@moodys.com remains vulnerable to negative news affecting Mexico’s perception abroad.
Diana Gonzalez +52.55.1555.5305 » Mexico’s domestic airline and hotel demand will suffer the brunt of the country’s
Associate Analyst
steep coronavirus-related currency depreciation, and companies in those sectors
diana.gonzalez@moodys.com
will assume most of the losses. Aeroméxico generates half of its cash in dollars and
Roxana Munoz +52.55.1253.5721
some 80% of its debt is dollar-denominated. The bulk of debt is dollar-denominated for
AVP-Analyst
roxana.munoz@moodys.com both Playa and Posadas, but Posadas generates only about 30% of its cash in dollars.
Marianna Waltz, CFA +55.11.3043.7309
Posadas and Playa are weakly positioned to face damage to consumer sentiment as
MD-Corporate Finance travel restrictions and poor consumer sentiment will limit tourist arrivals from the US.
marianna.waltz@moodys.com Aeroméxico’s liquidity will likely weaken in 2020, while its leverage will be significantly
higher through 2021, but the company has some flexibility to cut capacity, and lower oil
CLIENT SERVICES prices will help it contain costs.
Americas 1-212-553-1653
» A decline in traffic will cut revenue for the Mexican airport sector, but robust
Asia Pacific 852-3551-3077
historic traffic growth has strengthened the sector’s financial standing, and
Japan 81-3-5408-4100 domestic travel and adequate liquidity will help the airports maneuver this
EMEA 44-20-7772-5454 downturn. Mexico’s airport operators, including MEXCAT (Baa3 stable) and GAP (A3
stable), have robust historic traffic growth and domestic travel, as well as adequate
liquidity.
 MOODY'S INVESTORS SERVICE CROSS-SECTOR

The coronavirus
The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines
are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments
are unprecedented. We expect that credit quality around the world will continue to deteriorate, especially for those companies in the most
vulnerable sectors that are most affected by prospectively reduced revenues, margins and disrupted supply chains. At this time, the sectors
most exposed to the shock are those that are most sensitive to consumer demand and sentiment, including global passenger airlines, lodging
and cruise, autos, as well as those in the oil & gas sector most negatively affected by the oil price shock. Lower-rated issuers are most
vulnerable to these unprecedented operating conditions and to shifts in market sentiment that curtail credit availability. Moody’s will take
rating actions as warranted to reflect the breadth and severity of the shock, and the broad deterioration in credit quality that it has triggered.

For more information on research on and ratings affected by the coronavirus outbreak, please see moodys.com/coronavirus.

Coronavirus outbreak will strain Mexican tourism in 2020

Amid the rapid and widening global coronavirus outbreak, the airline and lodging sectors face the greatest exposure to shocks in
demand and in the capital markets. The risk to those sectors is significant across Latin America. Mexico, the seventh-most popular
destination worldwide for overseas visitors, is particularly vulnerable to weakness in those sectors, with nearly 9% of the country’s GDP
related to tourism.

The deteriorating global economic outlook, falling oil prices, and asset price declines resulting from the outbreak are already creating
a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects are unprecedented, and
the severity and duration of the pandemic and travel restrictions are uncertain. Our analysis assumes the coronavirus pandemic will
lead to severe cuts in passenger traffic over at least the next three months, including some periods when fleets are partially or mostly
grounded. Industry capacity will be cut in the second quarter of 2020, in some instances, more than 75% compared with the second
quarter of 2019. These levels reflect averages for the quarter, with peak cuts as high as 90% to 100% in April for some carriers, and
sustained very high cuts rolling into May. However, risks are tilted to a downside scenario, with deeper and longer declines in passenger
volumes, including a material extension into the third quarter of 2020. Since 2019 was a difficult year for the airline and lodging sector
with higher costs and sluggish demand, the rated Mexican airlines and lodging companies are weakly positioned to face a worse-than-
expected scenario.

Global pandemic will dampen Mexican domestic demand

Evidence increasingly suggests that the rapid spread of the coronavirus outside China since mid-February will dampen domestic
demand worldwide. The World Health Organization declared the coronavirus outbreak a global pandemic on 11 March, based on its
speed and scale of transmission. The US is already going through the rapid dissemination phase of the disease, with nearly 20 times
as many confirmed infections, and with suspensions of most flights from Europe and limiting nonessential travel on the US-Mexico
border. The Mexican Ministry of Health said the coronavirus in Mexico could start a similar phase by the end of March, with a much
more widespread outbreak. Likely travel bans or restrictions and partial or full temporary lockdowns will reduce air traffic, occupancy
rates and bookings. Hotel companies in Mexico and the Caribbean will need to waive cancellation fees for people holding reservations,
just as the lucrative spring break and at least some of summer vacation get underway.

Capacity and cost cuts will not be enough to offset a severe topline decline
Although pandemic diseases tend to be largely temporary phenomenon, the coronavirus’s effect on the credit quality of rated lodging
companies will last longer. Nevertheless, its effect on each company will depend on how well their liquidity allows them to endure
the lowest part of the economic cycle. In anticipation of upcoming decline in passenger demand and hotel bookings, companies are
reducing capacity and streamlining costs and investments. Airlines usually have greater flexibility as a large portion of their costs are
variable. Aeroméxico plans to cut capacity in 40% and will see its variable costs reduced following the decline in oil prices. Also it will

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on
www.moodys.com for the most updated credit rating action information and rating history.

2 20 March 2020 Cross-Sector – Mexico: Coronavirus outbreak adds to prevailing risks for crucial tourism sector
 MOODY'S INVESTORS SERVICE CROSS-SECTOR

likely reduce its capital spending from the original plan and lease payments could also fall as contracts mature in 2020. Likewise, Playa
should be able to downsize capital expenditure to basic maintenance levels considering that during 2019 it completed its expansion
plan. Both Playa and Posadas will likely close some properties during the outbreak to avoid the cash burn resulting from having null
revenues. Marketing expenses that increased for Mexican lodging companies after the cancellation of the touristic promotion council
could also be easily cut. Nevertheless, these measures will not be enough to fully offset the severe decline in revenues. Our base case
has increasingly moved towards the down part of our range with most likely having close to null revenues at least in April. There are
also some fixed costs that could not be streamed. Even for properties under temporary closures, staffing and utility usage should
continue to run to prevent long term damage or decay. Given the large scale back we expect of these companies during the outbreak, it
will take some to restore capacity, ultimately resulting in a long term negative effect in these companies business profile.

Coronavirus adds further stress to prevailing negative conditions

Mexico’s airline and lodging companies already had a difficult 2019, with weaker-than-anticipated operating results for Playa Resorts
(Caa1 negative), Grupo Posadas (B2 review for downgrade) and Grupo Aeroméxico (B2 review for downgrade). High capital investments
have used up significant amounts of cash that now limit all three companies’ means to endure the upcoming consequences of the
pandemic.
Exhibit 1 Exhibit 2
Coronavirus will keep lodging credit quality stressed in 2020 Companies will risk capacity to cover basic obligations
Moody's adjusted debt to EBITDA Moody's adjusted EBITA to interest
Playa Posadas Playa Posadas
14.0x 2.5x

12.0x
2.0x
10.0x

1.5x
8.0x

6.0x
1.0x

4.0x
0.5x
2.0x

0.0x 0.0x
2015 2016 2017 2018 2019 2020F 2015 2016 2017 2018 2019 2020F

Source: Moody's Investors Service. Source: Moody's Investors Service.

Mexico’s tourism sector had already been struggling with increasingly difficult conditions before the outbreak, including decelerating
economic growth in both Mexico and the US. Companies with coastal operations are highly exposed to a decline in US economic
growth: nearly 60% of Mexico’s international passengers arrive via the US, particularly into airports serving tourist-centric Cancun and
Los Cabos.

Tourism struggles with end of federal promotion and negative publicity

Without adequate promotion from the federal government, Mexico’s tourism sector is weakly positioned to recover rapidly from the
coronavirus outbreak, and remains vulnerable to negative news affecting Mexico’s perception abroad.

Mexico in 2019 canceled its federal entity responsible for promoting tourism, which had been funded through two taxes—a federal tax
charged to non-residents, plus a state hospitality tax. Although promotion is still included in the federal budget, the government cut
funding for promotion and reallocated it to other tourism projects, including the current administration’s flagship Mayan Train project.
Mexico had climbed eight positions in the World Tourism Organization’s ranking of international passengers since 2013, and promotion
efforts were key to building the sector’s momentum. Meanwhile, Mexico was investing heavily in airport infrastructure and hotels.
Mexico’s peso depreciated by more than 30% from 2013-19, and the positive economic environment in the US spurred foreigners to
visit Mexico.

3 20 March 2020 Cross-Sector – Mexico: Coronavirus outbreak adds to prevailing risks for crucial tourism sector
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Negative news has partly offset such gains. US safety warnings in the third quarter of 2017 advised against travel to Cancun and
Los Cabos. Both Posadas and Playa managed to keep occupancy rates relatively stable, but only by cutting prices for reservations.
Even after the US lifted the travel warning in 2018, the booking curve has yet to recover, and crime rates remain high, a persistent
vulnerability for the lodging sector. Images of sargassum seaweed flooding Mexico’s Caribbean beaches created further bad publicity for
lodging operators in 2019. A likely recurrence of summer flooding in 2020 would hamper even a rapid recovery from the coronavirus’
economic effects on the lodging sector.

Peso’s depreciation adds further stress for companies with foreign-exchange exposure
Mexico’s domestic airline and hotel demand will suffer the brunt of the country’s steep coronavirus-related currency depreciation, and
companies in those sectors will assume most of the losses.

Tourism is a major source of foreign exchange for Mexico. Tourist-oriented companies in Mexico generally benefit from a natural
foreign currency hedge, since most have much of their debt denominated in dollars, and generate significant portions of their cash
either in US dollars. But some companies remain effectively exposed to a depreciation of the Mexican peso. Aeroméxico generates
half of its cash in dollars and some 80% of its debt is dollar-denominated. The bulk of debt is dollar-denominated for both Playa and
Posadas, but Posadas generates only about 30% of its cash in dollars.

As of mid-March 2020, the exchange rate was around MXN23/USD1, a roughly 22% depreciation from its year-end 2019 level. Posadas
faces a big risk from an increasingly imminent need to refinance its 2022 maturities at a time of turbulent capital markets. A covenant
restriction on increased leverage poses a risk to Playas’ ability to draw funds from its $100 million revolving credit line.

Normally, higher demand from abroad would ease the peso’s depreciation as Mexican tourist destinations become more competitive.
Also, companies ordinarily can pass some of their certain dollar-denominated costs to passengers, such as fuel for Aeroméxico, easing
some of the foreign-exchange strain. But current conditions make some degree of travel bans from the US likely.

Posadas and Playa are weakly positioned to face damage to consumer sentiment. Travel restrictions and poor consumer sentiment will
limit tourist arrivals from the US—the origin of nearly 60% of Mexico’s overseas visitors—during the spring break holiday period in the
second week of April. By mid-March, global restrictions on worldwide travelers had tightened, and major events had been postponed or
canceled. The world tourism sector has proven historically an ability to rebound from crisis in a short time. Still, virtually any external
event would create volatility in Mexico’s sensitive tourism industry, as happened in 2009, when Mexico became the epicenter of the
H1N1 outbreak during the global economic crisis (see Exhibit 3).

Exhibit 3
Decline in tourism will resemble 2009 period of global economic crisis and H1N1 outbreak
Total GDP Tourism GDP
12.0
Global Financial Crisis
7.0

2.0

- 3.0

- 8.0

- 13.0

Source: INEGI.

Lower costs will partially offset airlines’ decline in passengers

Aeroméxico’s liquidity will likely weaken in 2020, while its leverage will be significantly higher through 2021, based on the severe
decline in Mexican airlines’ top lines and cash generation during the coronavirus outbreak in the US and Mexico. Under this scenario,
Aeroméxico plans to cut capacity in 40% to help cut costs, along with the March 2020 drop in oil prices, since Aeroméxico hedges only

4 20 March 2020 Cross-Sector – Mexico: Coronavirus outbreak adds to prevailing risks for crucial tourism sector
 MOODY'S INVESTORS SERVICE CROSS-SECTOR

50% of its annual fuel needs. Also, the extended grounding of the Boeing MAX aircraft gives Aeroméxico a chance to adjust capacity
rapidly by scaling back some of the short-term leases of its aged fleet that it had arranged to make up for the capacity shortage based
on the MAX’s grounding.

Although these factors alone will not be enough to alleviate the stress on Aeroméxico’s credit metrics, they will somewhat ease its cash
flow pressures, giving the carrier an advantage against local competitors with weaker credit quality and less ability to adjust costs and
capacity.

Mexico airports have track record of resiliency under stress

A decline in traffic will cut revenue for the Mexican airport sector, but robust historic traffic growth has strengthened the sector’s
financial standing, and domestic travel and adequate liquidity will help the airports maneuver this downturn. Under a severe economic
downturn, Mexico’s airports also have the advantage of concessions that allow for tariff-setting mechanisms based on volumes and
flexibility to adjust capital investments if needed.

While we expect a material cut in airport revenue to weigh on financial performance, this drop should be short-lived, and as soon as
the outbreak recedes, airports will likely recover to previous traffic levels, as they had after previous outbreaks, such as H1N1 in 2009
and Zika in 2016. Given the essential nature and strategic importance of the largest airports in Mexico, traffic typically recovers in a
relatively short timeframe. Still, a sustained global economic recession would likely slow the pace of recovery.

Today Mexico’s rated airports are in a strong position against the economic contagion from the outbreak. Passenger traffic has grow for
the Mexico City Airport Trust NAFIN F/80460 (MEXCAT, Baa3 stable) in recent years, and MEXCAT benefits from the pledge of Tarifa
de Uso Aeroportuario, one of its key tariffs. As of December 2019, MEXCAT had a relatively strong estimated debt-service coverage
ratio of 2.5x. The airport’s $4.2 billion outstanding bonds benefit from a six-month debt-service reserve to face any unexpected
liquidity needs.

Grupo Aeroportuario del Pacifico, SAB de CV (GAP, A3 stable) has strong passenger and financial performance, and benefits from
diversification, with 12 airport concessions in Mexico and two in Jamaica. The economic downturn will cut passenger traffic at GAP’s
airports that rely on tourism, such as Los Cabos and La Paz in Mexico, while airports with more diversified passenger groups such as
Guadalajara will not see as great an effect. GAP has strong liquidity, with roughly MXN7.5 billion ($326 million) in cash and equivalents
as of December 2019. While GAP does not maintain a debt-service reserve fund, it does maintain cash equivalent to at least two
months of operating expenses and debt-service payments.

Under a severe economic contraction scenario, concession frameworks also provide tariff setting based on expected traffic volumes,
allowing the concessionaires to recover their capital investments, plus a return. If traffic volumes fall short of expectations, the airports
can adjust or defer these capital investments.

5 20 March 2020 Cross-Sector – Mexico: Coronavirus outbreak adds to prevailing risks for crucial tourism sector
 MOODY'S INVESTORS SERVICE CROSS-SECTOR

Moody’s related publications

Sector comment:

» Coronavirus and oil price shocks: managing ratings in turbulent times, 17 March 2020

Outlooks:

» Global Macro Outlook 2020-21 (March 2020 Update): Coronavirus will hurt economic growth in many countries through first half
of 2020, 6 March 2020

» Passenger Airlines – Global: Outlook revised to negative as coronavirus stresses passenger demand, 6 March 2020

» Lodging & Cruise – US: Cutting outlook to negative as coronavirus hits bookings, causes cancelations, 6 March 2020

Sector in-depth reports:

» Corporates – Latin America & Caribbean: Coronavirus will most hurt airlines, lodging, and any companies with weak liquidity, 17
March 2020

» Emerging Markets – Global: Deepening ESG focus in emerging markets will spur growth in sustainable debt, 17 March 2020

» Corporates – Global: Heat map: Coronavirus hurts travel-driven sectors, disrupts supply chains, effects compounded with global
spread, 16 March 2020

» Corporates – North America: Heat map: Coronavirus will negatively impact corporate credit, effects widen in downside scenario, 16
March 2020

Rating methodologies:

» Business and Consumer Service Industry, October 2016

» Passenger Airline Industry, April 2018

» Publicly Managed Airports and Related Issuers, March 2019

» Privately Managed Airports and Related Issuers, September 2017

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this
report and that more recent reports may be available. All research may not be available to all clients.

6 20 March 2020 Cross-Sector – Mexico: Coronavirus outbreak adds to prevailing risks for crucial tourism sector
 MOODY'S INVESTORS SERVICE CROSS-SECTOR

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7 20 March 2020 Cross-Sector – Mexico: Coronavirus outbreak adds to prevailing risks for crucial tourism sector