Fitch: TMM, KCS Transaction Neutral to TFM Credit Quality.

Business Editors

CHICAGO--(BUSINESS WIRE)--April 25, 2003

Fitch Ratings does not expect the purchase of TFM, S.A de C.V's (TFM) by Kansas City Southern (KCS), to have a material impact on TFM's overall credit quality. Although the financing structure of the transaction has not been finalized, TFM's debt levels are not expected to increase over the near term, absent complete refinancing, due to the existence of significant debt covenants that limit the company's ability to pay dividends and/or complete inter-company transactions with its shareholders. The transaction is a mild positive to the extent that it will ultimately replace controlling shareholder Grupo TMM, S.A. (TMM), which is currently under financial distress, with KCS, which is financially stronger, but also highly leveraged. Fitch Ratings currently rates TFM's senior unsecured obligations at 'BB-', including $150 million senior notes due 2007, $443 million senior notes due 2009 and $180 million senior notes due 2012.

TFM's majority shareholder TMM announced an agreement to sell its 41% economic stake and controlling interest in TFM to minority shareholder KCS to generate much-needed cash. KCS and the Mexican government currently own 39% and 20% economic stakes in TFM, respectively. Under the proposed structure, TFM and KCS will be held by a new holding company named NAFTA Rail. According to the terms of the agreement, TMM will receive $200 million in cash and a 22% economic stake (20% voting stake) in NAFTA Rail. In addition, TMM may receive an incremental payment of between $100 million and $180 million based on the resolution of a tax-related legal dispute between TFM and the Mexican government. The transaction is subject to approval by the appropriate regulatory agencies, TMM bondholders, and TMM/KCS shareholders and is expected to close in the next 6 to 9 months.

Fitch expects KCS to fund the cash portion of the acquisition with $200 million of incremental debt. The acquisition financing will likely take place at either the NAFTA Rail holding company level or the KCS operating company level due to the existing debt structure in place at TFM. KCS also needs to finance a put option by the Mexican government to sell its 20% economic stake in TFM to KCS. The put option is estimated at approximately $480 million and is exercisable in October 2003. To the extent that either of these transactions is debt financed at either the NAFTA Rail or KCS level, the credit quality of KCS may be negatively affected. Fitch Ratings does not currently rate KCS.

Fitch still believes it will be difficult for TMM to avoid a default on its $177 million bullet maturity on May 15, 2003 due to the limited amount of time by which TMM must amend the debt exchange offering and receive sufficient participation by bondholders. Nevertheless, TMM creditors may benefit from the transaction by ultimately receiving higher recovery rates. Following announcement of the transaction, TMM altered the terms of its outstanding bond exchange offer to its 2003 and 2006 notes holders, and is now offering holders the equivalent par value of newly-issued 12% senior notes due 2004. The new notes contain certain provisions requiring TMM to apply cash received from the transaction and any positive outcome to the tax dispute to repurchase the new notes at par value. Fitch does not currently rate TMM's outstanding bonds. Fitch would view completion of this debt exchange offer as distressed and therefore as a default.

On a pro-forma basis, TMM continues to face weak credit protection measures. TMM is expected to generate an approximately $22 million in EBITDA during 2003, compared with debt levels of approximately $200 million. Therefore, EBITDA/Interest would remain around 1.0X and Debt/EBITDA around 9.0X. 2002 pro-forma credit protection measures for KCS and consolidated NAFTA Rail (assuming $200 million in incremental debt at KCS) would result in EBITDA/Interest and Debt/EBITDA of approximately 1.8X and 7.2X, and 2.3X and 4.9X, respectively.

TFM has a solid business position as the largest railroad in Mexico, long term growth opportunities in the North American market, and relatively stable financial position. Five years after privatization, TFM has improved the operating efficiency of its rail network and achieved relatively high profitability margins. During 2002, TFM had revenues of $712 million and EBITDA of $259 million. TFM's gross interest coverage, as measured by EBITDA/Interest, was 2.7X during 2002. The company's financial leverage, as measured by Debt/EBITDA was 3.9 at year end 2002. TFM's existing senior note indentures restrict additional indebtedness if EBITDA/Interest is below 3.0X. TFM does not currently pay out dividends.