RIO DE JANEIRO--(BUSINESS WIRE)--Fitch Ratings has downgraded Agencia de Fomento do Estado do Rio de Janeiro S.A.'s (AgeRio) long- and short-term local and foreign currency Issuer Default Ratings (IDRs), long- and short-term National Ratings and Support Rating. The Rating Outlook on the long-term IDRs and National Rating is Negative. A full list of rating actions follows at the end of the release.
KEY RATING DRIVERS - IDRS, NATIONAL RATINGS, SUPPORT RATINGS
The rating action mirrors the recent action on Agerio's parent, the State of Rio de Janeiro (ERio, long-term foreign currency and local currency IDRs 'BB+'/Negative Outlook). (See 'Fitch Downgrades the State of Rio de Janeiro's IDR to 'BB+'; Outlook Negative', dated Sept. 23, 2015 at 'www.fitchratings.com' for more details.)
AgeRio's ratings are driven by expected support from ERio and equalized to those of its parent. Therefore, the downgrade of the ratings reflects ERio's reduced capacity to support AgeRio. This is also reflected in the downgrade of AgeRio's Support Rating to '3' indicating Fitch's view that the probability of support would be moderate, in case of need. Fitch does not assign a Viability Rating to AgeRio, as it is a development agency.
Fitch views AgeRio as strategically important for ERio, as it acts as the state's development arm and implements its economic development policies. ERio controls 99.99% of AgeRio. Furthermore, by state law ERio's stake in AgeRio's voting shares cannot fall below 51%, and it is the financial agent or administrator of three state funds. A track record of frequent capital injections by ERio reinforces Fitch's view. According to Fitch, AgeRio's small size in relation to the GDP and the budget of ERio makes the cost of potential support relatively low and increases ERio's propensity to support AgeRio.
As of June 2015, AgeRio remained highly capitalized and posted a regulatory capital ratio of 66.97% (70.95% in December 2014). Further, the development agency's profitability was solid, as evidenced by its average ROA that reached 2.84% (1.49% in December 2014). On the other hand, impaired loans classified in the D-H range of the central bank's risk scale rose to 10.07% of total loans (5.37% in December 2014), while impaired loan coverage by reserves fell to 42.69% (89.67% in December 2014). This suggests that, given the weak operating environment, there could be an increase in provisioning expenses.
RATING SENSITIVITIES
IDRS, NATIONAL RATINGS, SUPPORT RATINGS
Changes in Parental Support: AgeRio's ratings are aligned with those of ERio. Therefore, any further changes in ERio's ratings or Rating Outlooks, or willingness to provide support to AgeRio, or in Fitch's evaluation of AgeRio's strategic importance to its parent, would result in changes in AgeRio's ratings.
Fitch has taken the following rating actions:
--Foreign and Local Currency long-term IDR downgraded to 'BB+' from 'BBB-', Outlook Negative;
--Foreign and Local Currency short-term IDR downgraded to 'B' from 'F3';
--Long-term National Rating downgraded to 'A+(bra)' from 'AA-(bra)', Outlook Negative;
--Short-term National Rating downgraded to 'F1(bra)' from 'F1+(bra)';
--Support Rating downgraded to '3' from '2'.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Global Non-Bank Financial Institutions Rating Criteria (pub. 28 Apr 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865351
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=991454
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991454
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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