Fitch Downgrades Six Brazilian Subnationals; Outlook Negative

SAO PAULO--()--Fitch Ratings has downgraded the states of Sao Paulo, Santa Catarina and Parana's Issuer Default Rating (IDR) to 'BB' from 'BB+'. Fitch has also downgraded the ratings for the cities of Sao Paulo and Rio de Janeiro to 'BB' from 'BB+'. In addition, Fitch has downgraded the IDRs for the state of Rio de Janeiro to 'B+' from 'BB'. The Rating Outlooks remain Negative.

KEY RATING DRIVERS - IDRs

The rating actions follow the recent downgrade of Brazil's ratings to 'BB' from 'BB+'(see "Fitch Downgrades Brazil to 'BB'; Outlook Negative", dated May 05, 2016 at www.fitchratings.com).

Considering the features of the Brazilian institutional framework, Fitch does not believe any subnational entity to be rated higher than the sovereign. This is the case of Sao Paulo (state and city), and the city of Rio de Janeiro, Parana and Santa Catarina, whose ratings were equalized with the sovereign at 'BB'.

The state of Rio's downgrade reflects its worse than expected fiscal deterioration, with more than anticipated reliance on non-recurring revenues. Fitch believes Rio de Janeiro to be incurring further leverage on the implicit support from the Brazilian federal government when it comes to the federal debt portion payment.

RATING SENSITIVITIES - IDRs

The IDRs of the seven Brazilian subnationals should move in tandem with Brazil's sovereign ratings. They would be affected by further changes in the sovereign ratings or Outlooks and/or in the government's willingness to provide support. Nevertheless, Fitch does not expect a change in the government's willingness to provide support for subnational debt if needed.

KEY ASSUMPTIONS

The ratings and Outlooks are sensitive to these assumptions:

--Fitch assumes a strong level of sovereign support for the Brazilian states and large cities given that their most relevant creditor is the federal government.

--Fitch assumes that Brazilian states maintain international and domestic market access even during periods of higher international financial volatility and further domestic shocks.

--Fitch expects some delays in progress on the government's legislative agenda, especially the items affecting subnationals.

Fitch has taken the following rating actions:

State of Sao Paulo:

--Long-Term Foreign and Local Currency IDRs downgraded to 'BB' from 'BB+'; Outlook Negative;

--Short-Term Foreign and Local Currency IDRs affirmed at 'B'.

City of Sao Paulo:

--Long-Term Foreign and Local Currency IDRs downgraded to 'BB' from 'BB+'; Outlook Negative;

--Short-Term Foreign and Local Currency IDRs affirmed at 'B'.

City of Rio de Janeiro:

--Long-Term Foreign and Local Currency IDRs downgraded to 'BB' from 'BB+'; Outlook Negative;

--Short-Term Foreign and Local Currency IDRs affirmed at 'B'.

State of Santa Catarina:

--Long-Term Foreign and Local Currency IDRs downgraded to 'BB' from 'BB+'; Outlook Negative;

--Short-Term Foreign and Local Currency IDRs affirmed at 'B'.

State of Parana:

--Long-Term Foreign and Local Currency IDRs downgraded to 'BB' from 'BB+'; Outlook Negative;

--Short-Term Foreign and Local Currency IDRs affirmed at 'B'.

State of Rio de Janeiro:

--Long-Term Foreign and Local Currency IDRs downgraded to 'B+' from 'BB-'; Outlook Negative;

--Short-Term Foreign and Local Currency IDRs affirmed at 'B'.

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

Metodologia Global de Ratings Para Governos Locais e Regionais - Fora dos Estados Unidos (pub. 19 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=880467

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1004223

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004223

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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
Paulo Fugulin
Director
+55 11 4504-2206
Fitch Rating Brasil Ltda.
Alameda Santos 700
Sao Paulo, Brazil
or
Carlos Ramirez
Senior Director
571-307-5180 ext.1240
or
Humberto Panti
Senior Director
+52 81 8399-9132
or
Committee Chairperson
Gerardo Carrillo
Senior Director
+52 55 5202 7602
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Paulo Fugulin
Director
+55 11 4504-2206
Fitch Rating Brasil Ltda.
Alameda Santos 700
Sao Paulo, Brazil
or
Carlos Ramirez
Senior Director
571-307-5180 ext.1240
or
Humberto Panti
Senior Director
+52 81 8399-9132
or
Committee Chairperson
Gerardo Carrillo
Senior Director
+52 55 5202 7602
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com