Fitch Affirms State of Parana at 'BBB-' & Downgrades Nat'l Rating to 'AA(bra)'; Outlook to Negative

SAO PAOLO, Brazil & BOGOTA, Columbia--()--Fitch Ratings has downgraded the Brazilian state of Parana's national long-term rating to 'AA(bra)' from 'AA+(bra). Fitch has also affirmed Parana's long-term Issuer Default Rating (IDR) at 'BBB-' and revised the Rating Outlook to Negative from Stable.

KEY RATING DRIVERS

The downgrade of the national ratings reflects the state of Parana's deteriorated fiscal performance, mostly explained by lower than expected tax revenues. Operating margins reached 2.3% in 2014, lower than the 5% initially projected. The Negative Outlook reflects challenges the state could face in 2015 in adopting measures to curb expenditures and improve revenues to a sustainable level.

Despite the implementation of several measures to reduce its growing personnel expenditures, these expenditures should surpass the 60% limit of net current revenues in 2015. In Fitch's opinion, the corrective measures will not lower expenditures to acceptable levels until 2020. Parana faced pressure to improve law enforcement and equalize wages in 2014. Fitch believes the political cost from the reduction in personnel is high.

Parana has entered into credit operations that totaled BRL1.1 billion in 2013 and 2014. As a result, Parana's debt metrics have increased, reaching 8.9x its current balance with debt service that consumed an equivalent to a high 203% of its operating balance in 2014. Compensating for its low level of self-financed capex (5.7% of total expenditures in 2014), Parana implemented several measures to foster private investments under the scope of Parana Competitivo (PC).

Parana estimates BRL35 billion in investments were carried out by private investors. These investments are likely to translate into higher economic growth and job creation as projects become operational. The maturity pace is undermined by logistics, workforce bottlenecks and overall heightened risk aversion environment.

With total assets of BRL8 billion, pension-related payments compromised some 12% of total expenditures in 2014, representing 28% of personnel expenditures, similar to other large states in Brazil. The consolidated financial performance of Parana's pension funds is slightly negative, with an annual deficit that reached BRL62 million (USD22.1 million) in 2014. Fitch believes Fundo Financeiro (FF) had an actuarial deficit of BRL195.1 billion in 2013, according to a report issued by the federal pension authority.

Fitch has taken the following rating actions on Parana:

--Foreign Currency long-term Issuer Default Rating affirmed at 'BBB-';

--Foreign Currency short-term Issuer Default Rating affirmed at 'F3';

--Local Currency long-term Issuer Default Rating affirmed at 'BBB-';

--Local Currency short-term Issuer Default Rating affirmed at 'F3';

--National long-term rating downgraded to 'AA(bra)' from 'AA+(bra)';

--National short-term rating at 'F1+(bra)'.

The Rating Outlook is revised to Negative from Stable.

RATING SENSITIVITIES

Rating Actions: A downgrade in the global scale rating could occur if the state is unable to control expenditures that result in operating margins structurally below 4%. Moreover, any rating action affecting the Federative Republic of Brazil (currently rated 'BBB'/Outlook Stable) may result in a similar action for Parana. Operating margins above 5% could lead to a Stable Outlook.

Parana accounted for 5.9% of Brazil's GDP in 2013, according to the Brazilian bureau of statistics. The services sector is prevalent, and the state is a relevant national producer of soft commodities

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

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (August 2012);

--'International Local and Regional Governments Rating Criteria (Outside the United States)' (April 2014);

--'National Scale Ratings Criteria' (October 2013).

Applicable Criteria and Related Research:

International Local and Regional Governments Rating Criteria - Outside the United States

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=719656

National Scale Ratings Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981139

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Paulo Fugulin
Director
Fitch Sao Paulo
Alameda Santos, 700, 7th floor
Sao Paulo, Brazil
+55-11-4504-2206
or
Secondary Analyst
Carlos Vicente Ramirez
Senior Director
+571 307-5180 ext. 1240
or
Committee Chairperson
Humberto Panti
Senior Director
+52-81-8399-9152
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Paulo Fugulin
Director
Fitch Sao Paulo
Alameda Santos, 700, 7th floor
Sao Paulo, Brazil
+55-11-4504-2206
or
Secondary Analyst
Carlos Vicente Ramirez
Senior Director
+571 307-5180 ext. 1240
or
Committee Chairperson
Humberto Panti
Senior Director
+52-81-8399-9152
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com