SAO PAULO--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of Agencia de Fomento do Parana at 'BBB-' and has withdrawn the Support Rating Floor reflecting Fitch's criteria. The Rating Outlook is Stable.
See the full list of rating actions at the end of this rating action commentary.
KEY RATING DRIVERS - IDRS and NATIONAL RATINGS
The Issuer Default Ratings (IDRs) and national scale ratings of Agencia de Fomento do Parana (FP) are equalized to those of its controlling shareholder, State of Parana (Parana; long-term IDR BBB-/Outlook Stable). FP is the financial agent of Parana, the administrator of state development funds and the finance arm of the state which works to foster economic growth in its home region. Under its methodology, Fitch views FP as 'core' to the state, since FP is a key and integral part of the state's public police. It also provides some core products and services to Parana's municipalities and to some private sector segments that are deemed to be relevant to the state.
The ratings assigned to Parana reflect its stagnant fiscal performance with operating margins close to 4%. In Fitch's opinion, Parana's operating margins reached the bottom of the cycle in 2013 with higher than expected expenditures, as observed with many other subnationals. The ratings also factor in its modest economic importance as the fifth-largest state in Brazil, its proprietary pension system converging to balance, and the financial flexibility stemming from Parana's most important creditor - the federal government, which accounted for 68.6% of total debt in September 2013.
Given the full secured portfolio with municipalities making up 89% of the total credit portfolio, losses in that segment tend to be minimal. As a result of FP's strategy to strive in private lending (i.e. microcredit and small companies with annual revenues up to BRL10 million), its loans delinquent for more than 90 days reached a low 0.3% of the total portfolio, with an immaterial level of renegotiated loans. Impaired loans to the private sector amount to 4.1% of the private portfolio in September 2013. FP has an ambitious plan to reach 25% of its credit portfolio with the private sector in the coming years from the current 7.1%. In Fitch's view, this can translate into some increase in credit costs given the larger risk imposed by those mostly non-secured exposures.
FP works with a lower loan interest rate than those practiced in the banking sector, due to its developmental role and not-for-profit nature. Following a capital withdrawal of BRL150 million in December 2013, regulatory capital should decrease to 40% from 80.9% in September 2013. Management has established a regulatory capital floor of 25% which will provide funding for its expansion strategy. Fitch notes that the state is prohibited from withdrawing additional capital, effective since January 2014.
KEY RATING DRIVERS - Support Rating and Support Rating Floor
The Support Rating Floor has been withdrawn reflecting the agency's belief that the most likely form of support is institutional, rather than sovereign support. There are no formal requirements from the State to inject capital into FP, although FP is still financed mostly by the equity provided by the state of Parana.
Moreover, there are plans to increase third-party funding to operate most intensively with private loans. In Fitch's view, these factors are still compatible with a high probability of institutional support provided by the state of Parana.
RATING SENSITIVITIES - IDRS and NATIONAL RATINGS
FP's IDRs are equalized with its parent's IDRs, the State of Parana.
Any changes in Parana's IDRs or in its propensity and willingness to provide support to FP could directly affect the development agency's ratings.
Fitch affirms the following ratings:
--Foreign and local currency long-term Issuer Default Ratings (IDRs) at 'BBB-'; Outlook Stable;
--Foreign and local currency short-term IDRs at 'F3';
--National long-term rating at 'AA+(bra)'; Outlook Stable;
--National short-term rating at 'F1+ (bra)'.
--Support Rating at '2';
--Support Rating Floor WD.
Additional information is available on www.fitchratings.com
Applicable Criteria and Related Research:
-- 'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);
-- 'National Ratings - Methodology Update' (Oct. 31, 2013).