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Fitch Affirms Grupo Ferroviario Mexicano's IDRs at 'BBB-'; Ferromex Debt at 'AA(mex)'

GFM

--Foreign currency IDR at 'BBB-';

--Local currency IDR at 'BBB-'.

Fitch has also affirmed the outstanding debt ratings of Ferrocarril Mexicano S.A. de C.V. (Ferromex) as follows:

Ferromex

--National scale at 'AA(mex)';

--Mexican peso-denominated bonds (certificados bursatiles) at 'AA(mex)'.

The Rating Outlook is Stable.

GFM and Ferromex's investment grade ratings are supported by their strong operational performance and increased contribution to Grupo Mexico's consolidated revenues and EBITDA in 2009. In turn, the ratings also benefit from the majority ownership of their strong parent. Ferromex is 100% owned through Grupo Mexico's intermediate holding company GFM, which is in turn 74% owned by Infraestructura y Transportes Mexico (ITM), Grupo Mexico's direct railroad and infrastructure holding company, and 26% owned by Union Pacific in the USA. Grupo Mexico owns 74.9% of ITM, and Carso-Inbursa owns 25.1%. ITM's consolidated contribution to Grupo Mexico's revenues and EBITDA increased to 23% and 19%, respectively, for the LTM ended Sept. 30, 2009, significantly up from 18% and 11% in 2008. Ferrosur, Grupo Mexico's other railroad subsidiary, is not currently consolidated in Grupo Mexico's financial reporting.

Solid Operational Performance During Downturn:

GFM's financial performance during the economic downturn has been resilient. GFM's consolidated revenues were USD924 million during the LTM ended Sept. 30, 2009, a 14.6% reduction from USD1 billion in 2008, while its EBITDA declined to USD258 million from USD335 million at last year end. However, GFM's consolidated LTM EBITDA margin of 29% compares to 33% in 2008, benefiting from lower diesel costs since July 2009 and the implementation of a fuel surcharge when prices were high. GFM also exhibits a natural currency hedge due to 30% of its revenues being denominated in USD as approximately 37% of its railway cars cross U.S. borders. The company funds its capital expenditures internally, with the exception of its locomotives which it finds more efficient to fund via debt. Average life of the railway car fleet is 21 years, with the newer models more profitable due to their more efficient diesel consumption. Ferromex currently has 582 locomotives and 11,857 railway cars.

Manageable Debt Levels and Amortization Profile:

GFM's total consolidated debt declined to USD368 million at the end of September 2009 from USD398 million at the end of 2008. For the same period, GFM's total lease adjusted debt to EBITDAR ratio was 1.9 times (x), and its FFO adjusted leverage ratio was 2.1x based on a Fitch calculated lease-adjusted debt amount of USD531 million. The company's cash and marketable securities position for the same period totaled USD84 million, sufficient to meet maturities up to 2011. Fitch expects the company's lease-adjusted debt ratio to remain under 2.0x, consistent with its rating category.

Leading Railroad Network:

The ratings are further supported by Ferromex's position as the largest railroad in Mexico with a track network of 8,111 km which covers approx 70% of Mexico's territory and account for approximately 53% of Mexico's railway load distribution market share as measured by million Net Tons/kilometer. Fitch expects to see future growth potential in Grupo Mexico's railroad businesses due to the 40% penetration of railroad transportation in the U.S. and Canada versus 25% in Mexico. Ferromex's cargo exhibits a diversified product mix of which agricultural cargo accounted for 37% of its Net Tons/kilometer as of Sept. 30, 2009. The next most important categories were mineral (16%) industrial (10%), chemicals (9%), metals (7%) and energy (7%). Management intends to implement the first phase of a new rail-track infrastructure investment over the next eight years along with the building of a new port, signaling one of the largest infrastructure projects of this scope seen in Mexico in recent times.

Possible Future Synergies:

Grupo Mexico intends to merge Ferromex with Ferrosur thus linking five gateways along the Mexico-U.S. border with four seaports on the Pacific Ocean and four seaports on the Gulf of Mexico. By doing so, significant synergies are expected to materialize. However, the proposed merger between Ferromex and Ferrosur is currently prevented due to antitrust issues which are in the process of being resolved. Ferrosur is based in southeast Mexico with 1,813 km of track and 9% of annual tonnage market share with 153 locomotives and 4,333 railway cars. Fitch does not expect a resolution on this issue for at least one year. In addition, the company is in negotiations to receive its 'CEPAT' status which is the certification required from the U.S. transport authorities to conduct cross-border operations which will further benefit its operations.

Additional information is available at 'www.fitchratings.com'.

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Fitch Ratings
Jay Djemal, +1-312-368-3134
Joe Bormann CFA, +1-312-368-3349 (Chicago)
Alberto Moreno, +52-82-8335-7179 (Mexico)
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