March 9, 2016 / 5:07 PM / 2 years ago

Fitch Affirms Parana's IDR at 'BB+'; Outlook Negative

(The following statement was released by the rating agency) SAO PAULO, March 09 (Fitch) Fitch Ratings has affirmed the Brazilian state of Parana's National long-term rating at 'AA(bra) and revised the Rating Outlook to Stable, from Negative. In addition, Fitch has affirmed the state's Long-Term Issuer Default Rating (IDR) at 'BB+'/Negative Outlook. KEY RATING DRIVERS The affirmation of the national ratings reflects the State of Parana's (Parana) better than anticipated revenue generation in 2015, following the adoption of a tax rate increase approved in late 2014. As a result, according to Fitch's calculation, the state's operating 2015 margin increased to 4.9% factoring in the adoption of some measures to curb expenditures and improve revenues to a sustainable level. Although expenditures are likely to surpass the equivalent of the 60% limit of net current revenues in 2016 and 2017 based on the fiscal adjustment program, Parana has implemented several measures to reduce its growing personnel expenditures that resulted in a relatively low 4.8% expansion in 2015. This compares favorably with other states. Although positive, Fitch believes the political cost of further reduction in personnel is high. In an attempt to reduce the short-term financial shortage of Fund Financeiro (FF), one of its three funds, Parana approved the migration of 33,500 beneficiaries to the balance fund Fundo Previdenciario (FP) in late 2014. FP now covers 47.8% of 127,000 employees affiliated with the state pension program. As a result, Parana saved some BRL1.5 billion in pension payments in 2015. As per Fitch's approach, this savings does not impact the operating margin because it reallocates assets of the state. The current administration continues with its efforts toward controlling the current expenditure. Such practice has not frequently been seen recently in its peer group. Moreover, the state anticipated the increase in tariffs in late 2014 and that strategy was successful in 2015 as expressed by tax collection increases above inflation. Parana entered into credit operations for capex of BRL1.2 billion in 2014 and 2015. As a result, direct debt reached the equivalent of 23.6% of its current balance, which is still manageable. Total debt service, including the federal debt portion, consumed an equivalent of 102.7% of its operating balance in 2015. Compensating for its very low level of self-financed capex, which accounted for 2.3% of total expenditures in 2015, Parana has benefited from the maturing of private investments under the scope of the Parana Competitivo program (PC). Parana estimates BRL25 billion was carried out by private investors. This amount corresponds to 3.8x the investments made by the state from 2010 to 2015. Some of these private projects benefited from tax incentives. RATING SENSITIVITIES Negative Factors: Any rating action affecting the Federative Republic of Brazil ('BB+'/Negative Outlook) may result in a similar action for Parana. An increased cost structure may also lead to further downgrades in both national and international ratings. Positive Factors: An upgrade in the national scale rating could occur if the state is able to generate operating margins above 5%. KEY ASSUMPTIONS The ratings and Outlooks are sensitive to these assumptions: --A strong level of sovereign support for the State of Parana given that the state's most relevant creditor is the Federal Government. Fitch's base case does not assume a severe change in Parana's key structural features. --Brazilian Subnationals maintain international and domestic market access even if there is higher international financial volatility and further domestic confidence shocks. Fitch affirms the following ratings: State of Parana --Foreign and Local Currency Long-Term IDR at 'BB+'; Negative Outlook; --Foreign and Local Currency Short-Term IDR at 'B'; --National Long-term at 'AA(bra)'; Stable Outlook; --National Short-term rating at 'F1+'(bra)'. Contact: Primary Analyst Paulo Fugulin Director Fitch Sao Paulo Alameda Santos, 700, 7th floor Sao Paulo, Brazil +55-11-4504-2206 Secondary Analyst Carlos Vicente Ramirez Senior Director +571 326-9999 ext. 1240 Committee Chairperson Humberto Panti Senior Director +52-81-8399-9152 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Date of Relevant Rating Committee: March 08, 2016 Additional information is available on www.fitchratings.com The source of information used to assess these ratings were State of Parana as of December 2015. Applicable Criteria International Local and Regional Governments Rating Criteria (pub. 18 May 2015) here National Scale Ratings Criteria (pub. 30 Oct 2013) here Tax-Supported Rating Criteria (pub. 14 Aug 2012) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1000657 Solicitation Status here Endorsement Policy here ail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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.

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