Fitch Ratings Affirms TFM At 'B+'.

CHICAGO -- Fitch Ratings has affirmed the 'B+' foreign and local currency senior unsecured ratings of TFM, S.A. de C.V. (TFM). The Rating Outlook is Stable. The foreign currency rating applies to the following debt:

-- US$150 million senior notes due 2007;

-- US$443.5 million senior notes due 2009;

-- US$180 million senior notes due 2012.

TFM's 'B+' ratings reflect the company's challenging operating environment, high leverage, flat earnings, and tight liquidity.

Over the last two years, TFM has operated in a challenging environment characterized by higher fuel costs, a depreciating Mexican peso versus the U.S. dollar and a general shift in manufacturing to China from several countries, including Mexico. This latter factor has resulted in a decline in the shipment of cargo from some sectors served by the company, including automotive. Through the first nine months of 2004, TFM's revenues were flat vis-a-vis those of 2003.

TFM remains highly levered. As of Sept. 30, 2004, TFM had about US$1.4 billion in total debt, consisting of US$773 million in unsecured bonds, a US$133 million term loan and an estimated US$495 million of off-balance debt associated with lease obligations. TFM's EBITDAR, which is defined as EBITDA plus the company's annual locomotive and railcar lease payments, is expected to be about US$280 million in 2004 or essentially the same level as in 2003. The ratio of total debt-to-EBITDAR has remained at about 5.0 times (x) throughout the last several years. EBITDAR covered fixed expenses, defined as interest expense plus lease payments, by about 1.6x as of Sept. 30, 2004, and in 2003.

TFM's liquidity is poor with only US$11.8 million of cash as Sept. 30, 2004. Fitch believes, that neither the expected transaction to sell Grupo TMM's indirect stake in TFM to Kansas City Southern (KCS) nor the resolution of TFM's value added tax (VAT) claim is likely to provide any cash for debt reduction at TFM. Despite the continued favorable court rulings for TFM's claim to an estimated US$1 billion value added tax refund from the Mexican government, a considerable amount of doubt exists as to whether any portion of TFM's VAT refund will be in the form of cash.

The Mexican government holds a PUT option for its 20% equity interest in TFM. Grupo TFM's shareholders, Grupo TMM and KCS, are obligated to acquire the shares that the government holds in TFM if they are not purchased by the public. In one scenario, the government could put its 20% of TFM's shares to Grupo TFM, and Grupo TFM could acquire the Mexican government's 20% stake in TFM. Because the government has lost most of the steps in TFM's VAT negotiation process, it could effectively offset the VAT refund it owes to TFM with the proceeds of the sale of TFM in a cashless transaction as proposed by Grupo TFM's shareholders.

Fitch views the proposed transaction in which Grupo TMM would sell its 51% voting interest in Grupo TFM to Kansas City Southern (KCS) as being mildly positive for TFM. The transaction would replace TFM's financially distressed controlling shareholder, Grupo TMM, with KCS, a U.S. entity that has a stronger financial profile but one that is also highly leveraged. In addition, TFM may be able to refinance and borrow at a lower cost in the future under the control of KCS which is a somewhat stronger financially vis-a-vis Grupo TMM. Nevertheless, on a pro forma basis, KCS would continue to be a small railway and about two-thirds of its operating earnings would be generated by the Mexican operations.

Fitch's 'B+' ratings incorporate an expectation that the transaction with KCS will be completed as both parties, Grupo TMM and KCS, negotiated an amended acquisition agreement announced in December 2004. The new agreement is similar to the original one, but also includes US$157 million of contingency payments tied to the resolution of the VAT and PUT matters. The amended terms for the sale of Grupo TFM to KCS also include a US$200 million cash payment, much of which is required to be used to reduce debt at the Grupo TMM holding company level; cash available for debt reduction at the TFM operating company level is unlikely to result from the transaction with KCS. If the acquisition does not occur by Oct. 5, 2005, the expiration date of the approval of the transaction by Mexico's Foreign Investment Commission (FIC), nor does the Mexican Federal Competition Commission (FCC) extend its approval of the transaction before April 2005, TFM's ratings would likely be lowered.

TFM holds the concession to operate Mexico's northeastern rail lines and is Mexico's largest railroad by volume. The company transports more than 40% of Mexican rail volume and owns more than 2,600 miles of rail track. TFM is the only Mexican carrier to Laredo, Texas, the largest freight exchange point between the United States and Mexico. TFM also serves three of Mexico's four primary seaports and approximately 80% of the company's revenue is related to international freight. In 2003, TFM's revenues were generated from the following main industries: agro-industrial (22%), automotive (19%), chemical (18%) manufacturing and mining (31%) and intermodal (8%). TFM is an operating company 80% owned by Grupo TFM and 20% owned by the Mexican government. Grupo TFM, a holding company, is currently 51% owned by Grupo TMM and 49% owned by Kansas City Southern (KCS).