Fitch: TMM Proposed Debt Exchange to Have Neutral Effect on TFM.

Business Editors

CHICAGO--(BUSINESS WIRE)--Jan. 23, 2003

Fitch Ratings views Grupo TMM, S.A.'s (TMM) proposed debt exchange offering as a distressed debt exchange, in part reflecting the lack of apparent alternative financing options available to the company. As a distressed debt exchange, TMM's $177 million 9.5% senior notes due 2003 and $200 million 10.25% senior notes due 2006 would be considered in default ('DD') under Fitch's rating methodology upon completion of the exchange, and the existing notes would be rated in the default category for 30 days. At that time, a new rating would be assigned to the newly-issued notes. Fitch does not rate these securities but does rate its operating subsidiary TFM, S.A. de C.V. (TFM).

Fitch does not expect TMM's debt restructuring to have a material impact on the credit quality of its operating subsidiary TFM; TFM's senior unsecured debt obligations are currently rated 'BB-'. TFM's credit profile is significantly stronger than that of TMM. TFM generates relatively stable levels of cash flow from its operations and does not require financial support from its shareholders. In addition, TMM does not have sole control over TFM's business and financial strategy. TMM owns a 41% economic stake in TFM, while Kansas City Southern Industries and the Mexican government own a 39% and 20% economic stake, respectively. TFM's financial policies are governed by a shareholder agreement that somewhat insulates the company from TMM and allows it to be rated on a stand-alone basis. In addition, TFM's debt covenants limit its ability to pay dividends to its shareholders. Last year, a shareholder dispute was settled with TMM returning a cash dividend payment back to TFM.

TFM's ratings are based on the company's solid business position as the largest railroad in Mexico, long-term growth opportunities in the North American market, and stable financial position. Five years after privatization, TFM has improved the operating efficiency of its rail network and achieved relatively high profitability margins. TFM's gross interest coverage, as measured by EBITDA/Interest, is estimated at slightly below 3.0X for 2002. The company's financial leverage, as measured by Debt/EBITDA is estimated at slightly above 4.0X for 2002. TFM generates enough cash flow to finance currently budgeted capital expenditures.

On Dec. 26, 2002, TMM announced a debt exchange offering open to holders of the $177 million 9.5% senior notes due 2003 and $200 million 10.25% senior notes due 2006. Holders who participate in the debt exchange will receive 100% principal amount of newly-issued 10.75% senior notes due 2010. These notes are issued by TMM and guaranteed by its wholly owned subsidiary TMM Holdings, whose assets consist of TMM's shares in TFM. As a result, holders who do not participate in the debt exchange will be in a subordinated position to holders of the newly issued notes. The debt exchange offering, which expires on Feb. 11, 2003, requires the minimum participation of 85% of the holders of the senior notes due 2003 and 50% of the holders of the senior notes due 2006. Successful completion of the debt exchange would be positive for TMM as it would lengthen debt maturities, thus reducing refinancing risk.

TMM launched the debt exchange offering in anticipation of its significant refinancing needs totaling more than $200 million over the next year, including the $177 million senior notes maturing in May 2003. In the absence of a debt exchange or asset sales, TMM is considered likely to default on these notes because it has low cash balances and does not generate significant free cash flow. TMM has not announced any alternative financing options to the debt exchange.

Although the completion of a debt exchange would lengthen debt maturities, TMM's debt levels would remain high. At 9/30/02, TMM (excluding debt at TFM) had an estimated $436 million in debt, including $177 million senior notes due 2003, $200 million senior notes due 2006, $59 million short term debt including euro commercial paper, convertible notes, and other debt. In addition, TMM had an off-balance sheet receivables securitization program totaling $23 million at 9/30/02. Subsequently, TMM increased its securitization program by $30 million in October 2002 and an additional $35 million in December 2002, and a portion of the proceeds were used to pay down short-term debt.

TMM (excluding TFM results) also faces weak credit protection measures. TMM's interest coverage weakened to an estimated 1.0X during the first nine months 2002 compared to 1.3X during the previous comparable period as the company faced a negative operating environment. In particular, the level of international trade between the United States and Mexico, which grew steadily through the late 1990s, slowed starting in 2001 due to the negative economic environment in the United States. TMM is expected to generate an estimated $60 million in EBITDA during 2002, compared with debt levels of $436 million. Therefore, credit protection measures are expected to remain weak over the near term, with estimated EBITDA/Interest around 1.0X and Debt/EBITDA above 7.0X

TMM has a solid business position in the Mexican transportation and logistics sector. TMM is the largest integrated logistics and transportation company in Mexico. The company offers four major types of services, including 1) specialized maritime shipping, 2) logistics operations, including dedicated contract trucking and integrated logistics outsourcing services, 3) port and terminal operations, and 4) through its equity stake in TFM, rail transport between Mexico and the United States. TMM's network of ports, railroads, and land operations provides significant synergies and is considered difficult to replicate by competitors. In addition, TMM has long term growth opportunities in the NAFTA market. However, TMM's business is highly dependent on the level of international trade between the United States and Mexico.