Fitch Downgrades State of Rio de Janeiro to 'C' from 'B-'
KEY RATING DRIVERS
The downgrade to 'C' from 'B-' indicates that the state has entered again into a grace or cure period following the non-payment of a financial obligation with another multilateral institution, and Fitch expects this process to be recurrent. The 'C' rating also reflects exceptionally high levels of credit risk.
Fitch acknowledges that ERio has not performed many financial obligations in the period between May 2016 and mid-September 2016 with both federative and multilateral institutions amounting over US160 million. Fitch does not expect ERio to have the financial or fiscal capacity nor willingness to honor future debt service commitments due in the last quarter of 2016, especially to other multilateral and commercial institutions.
Fitch also recognizes that none of the financial obligations listed above have experienced a default, because the National Treasury of Brazil (NTB) has covered ERio's debt service during the grace period as per each individual guarantee contract.
Following the payment, the NTB enters in a recovery procedure with ERio. The Treasury accesses the collateral agreed upon in each individual guarantee contract with ERio such as the collection of proprietary taxes such as ICMS or IPI Export among others, and Constitutional Transfers such as FPE.
The liquidity position of the State of Rio de Janeiro has been deteriorating very fast in recent months. Its operating margins are negative, one reason why the administration had to resort to nonrecurring revenues to cover operating expenditures. Recently, ERio and many other Brazilian subnationals received a bail-out of the debt service they have with the Federal Government until 2017.
Guaranteed Debt: Fitch does not expect ERio to enter into default, since virtually all debt is guaranteed by the Federal Government. The small amount of unsecured debt is against Federal Institutions and could be renegotiated under more favorable conditions.
Recovery in Financial Performance: Once ERio's fiscal and financial performance recovers and it is able to honor its committed financial obligations in due time with no external aid, the Fitch will revise its ratings.
The ratings are sensitive to:
--The high level of sovereign support for ERio, given that the state's most relevant
Creditor is the Federal Government who also guarantees all external debt.
Fitch has downgraded the following actions:
State of Rio de Janeiro:
-- Long-Term Foreign Currency IDR to 'C' from 'B-';
-- Short-Term Foreign Currency IDR to 'C' from 'B';
-- Long-Term Local Currency IDR to 'C' from 'B-';
-- Short-Term Local Currency IDR to 'C' from 'B';
-- Long-Term National to 'C(bra)' from 'BB-(bra)';
-- Short-Term National rating to 'C(bra)' from 'B(bra)'.