SAO PAULO--(BUSINESS WIRE)--Fitch Ratings has downgraded the Brazilian city of Rio de Janeiro'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 18 months.
In addition, Fitch has affirmed the Long-Term Issuer Default Rating (IDR) at 'BB'. The Rating Outlook remains Negative. The Outlook reflects the Negative Outlook assigned to Brazil. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The affirmation of the IDRs assigned to the City of Rio de Janeiro (CRio) reflect the generation of operating margins that reached 4.9% in 2015 in a declining trend. This is higher than 'BB' rated peers (3.9%). The declining trend observed since 2015 is attributable to the prolonged economic downturn. The ratings are strongly related to those assigned to the Federative Republic of Brazil. For this reason, CRio's ratings have a Negative Outlook.
Despite the fact that the Federal Government remains directly and indirectly the city's main creditor, debt service related to financial institutions has been increasing at a fast pace, consuming the equivalent of 74% of the city's operating balance in 2015. Unless operating balances increase, direct debt service will continue to consume a relevant portion of it, thus exerting pressure over investments and cash positions, in Fitch's opinion.
CRio has engaged in several credit operations to improve transportation and logistics in Rio. Whereas 'BB' rated entities' capex represented 10.1% of total expenditures, it reached 19.9% for CRio. As a result, debt service until 2018 should consume a large portion of the city's operating balance. This is counterbalanced by the fact that federal creditors are responsible for 96% of new credit operations until 2018.
The prolonged economic recession has not yet translated into a poor fiscal performance for CRio, partially explained by the fact that the city traditionally host large events, such as the Olympics. Nevertheless, there should be some increase in operating expenditures in 2017 given that in early 2016 the city assumed the operating expenditures of two hospitals owned by the State of Rio de Janeiro (IDR of C). Additional pressures in healthcare and law enforcement may negatively impact the city's operating margins. Federal and state transfers are important components of the city's operating revenues, corresponding to 24.7% of the total in 2015.
Despite consuming some 37.5% of total annual personnel expenditures in 2015, the pension system has some assets and its actuarial deficit of BRL3.2 billion corresponded to a low 14.5% of the city's operating revenues. This is much better when compared to large Brazilian states, partially explained by the fact that contrary to states, Brazilian cities do not have to support law enforcement.
Fitch considers CRio's liquidity as adequate, with no short-term concerns. Total debt service of BRL818 million in 2016 is fully covered by the city's outstanding cash position of BRL3.6 billion. This liquidity amount corresponds to 16.2% of the city's operating revenues in 2015. The short-term obligations are mainly composed of debt service and payments to suppliers (42%) and general labor liabilities (22%).
Rating Actions Linked to the Sovereign: Any rating action affecting the Federative Republic of Brazil, currently rated 'BB'/Negative, will exert a direct influence on CRio's ratings.
Fiscal Performance and Debt: An operating margin lower than 2% coupled with a higher level of financial debt, and expressed by a direct debt/current balance higher than 20 years will exert negative pressure on CRio's ratings.
The ratings and Outlooks are sensitive to these assumptions:
--Fitch assumes a high level of sovereign support for the Rio de Janeiro given the national relevance of the city and the high exposure to Federal Government decisions;
--We also assume that the new government will resume the government's legislative agenda, especially those items affecting subnationals, such as pension reform and federal debt renegotiation.
Fitch has taken the following rating actions:
City of Rio de Janeiro
--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 rating downgraded to 'AA(bra)' from 'AA+(bra)'; Stable Outlook;
--National Short-term rating affirmed at 'F1+(bra)'.
Additional information is available at www.fitchratings.com
International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016)
National Scale Ratings Criteria (pub. 30 Oct 2013)
Dodd-Frank Rating Information Disclosure Form
Copyright© 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001