Fitch Ratings has downgraded the Brazilian state of Sao Paulo's
national long-term rating to 'AA(bra)' from 'AA+(bra)' with a
Stable Outlook as a result of ratings recalibration following
successive downgrades of the sovereign over the last six
months.
Fitch has also affirmed the Long-Term Issuer Default Rating
(IDR) at 'BB'. The Rating Outlook remains Negative. The Outlook
reflects the Negative Outlook assigned to Brazil on May 9, 2016.
The full list of rating actions follows at the end of this
release.
KEY RATING DRIVERS
The state of Sao Paulo's rating affirmation reflects its strong
economy, which is about one-third of the Brazilian GDP. The ratings
are based on an adequate fiscal performance when compared to peers
in the same rating category with a better fiscal autonomy in
relation to Brazilian states. The ratings are also supported by the
fact that Sao Paulo's most important creditor is the federal
government.
Fitch no longer expects Sao Paulo to post operating margins
higher than 5%. In 2015, operating margins reached 5.4%. Operating
margins should stabilize close to 3% by 2018, according to Fitch's
calculations. Fitch believes the state has been resorting to using
nonrecurring revenues, but in much lower proportion when compared
to other large Brazilian states.
The prolonged economic recession has translated into a poor
performance in tax collections, especially for Sao Paulo, whose
economy is more influenced by the industrial sector. Sao Paulo's
fiscal performance is dependent on the Imposto Sobre Circulacao de
Mercadorias e Servicos (ICMS) tax, which is highly correlated with
the performance of the national economy. Fitch expects Brazil to
contract by 3.5% in 2016, with some recovery expected in 2017.
Sao Paulo's financial debt has been increasing. In 2015, direct
debt over current balance jumped to 7.6 years from 1.9 years
registered in 2014. According to the state's debt projections, this
ratio should materially diverge from historical values reaching
levels close to 20 years, but still lower than 'BB' rated entities
(33 years). Sao Paulo's exposure to foreign debt is relatively low
and should consume less than 25% of the state's operating balance
until 2019.
Pension payments have been compromising a relevant portion of
personnel expenditures. In 2015, Sao Paulo allocated some 34.5% of
total annual personnel expenditures, or BRL2.3 billion per month,
to its proprietary pension system. Operating as a cash-based fund,
financial shortages should increase on average by 15% over the last
five years, reaching BRL19.3 billion in 2016, or 9.5% the state's
operating revenues.
Fitch considers Sao Paulo's liquidity as adequate, with no
short-term concerns, even considering an amount of unpaid
commercial short-term liabilities that corresponded to 8% of
operating revenues in 2015. The short-term obligations are mainly
composed of debt service (33%) and credit and tax provisions (23%).
The outstanding cash positions of BRL22.2 billion covered 42.4% of
the state's obligations due in 2016 and corresponded to 10.9% of
the state's operating revenues (9.3% in 2014).
RATING SENSITIVITIES
State of Sao Paulo's ratings are capped by the Brazilian
sovereign. Any rating action affecting the Federative Republic of
Brazil, currently rated 'BB'/Outlook Negative, will exert a direct
impact over Sao Paulo's ratings.
An operating margin lower than 2% coupled with a higher level of
financial debt and expressed by a direct debt/current balance
higher than the equivalent to 20 years, could exert negative
pressure on Sao Paulo's ratings.
KEY ASSUMPTIONS
The ratings and Outlooks are sensitive to these assumptions:
--Fitch assumes a high level of sovereign support for Sao Paulo
given the national relevance of the state and the fact the state's
most relevant creditor is the Federal Government.
--Fitch assumes that any political transition to a new
government during the impeachment process will be smooth and
peaceful but with some delays in progress on the government's
legislative agenda especially the ones affecting subnationals such
as pension reform and federal debt renegotiation.
Fitch has taken the following rating actions:
State of Sao Paulo:
--Foreign Currency Long-Term IDR affirmed at 'BB'; Negative
Outlook;
--Foreign Currency Short-Term IDR affirmed at 'B';
--Local Currency Long-Term IDR affirmed at 'BB'; Negative
Outlook;
--Local Currency Short-Term IDR affirmed at 'B';
--National Long-term downgraded to 'AA(bra)' from 'AA+(bra)';
Stable Outlook;
--National Short-term rating at 'F1+(bra)'.
Additional information is available on www.fitchratings.com
Applicable Criteria
International Local and Regional Governments Rating Criteria -
Outside the United States (pub. 18 Apr 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878660
National Scale Ratings Criteria (pub. 30 Oct 2013)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1009552
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009552
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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Fitch RatingsPaulo FugulinDirector+55 11 4504-2206Fitch Rating
Brasil Ltda.Alameda Santos 700Sao Paulo, BrazilorAlfredo
SaucedoDirector+52 81 8399-9100orCommittee ChairpersonChristophe
ParisotManaging Director+ 33 1 44 29 91 34orMedia
Relations:Elizabeth Fogerty, +1
212-908-0526elizabeth.fogerty@fitchratings.com