OREANDA-NEWS. Fitch Ratings has affirmed the Brazilian state of Santa Catarina's National long-term rating at 'AA-(bra)/Stable Outlook. In addition, Fitch has affirmed the state's Long-Term Issuer Default Rating (IDR) at 'BBB-'/Negative Outlook.

KEY RATING DRIVERS

The affirmation of the ratings reflects Estado de Santa Catarina's (Santa Catarina) fiscal performance according to Fitch expectations. Operating margins reached 4.8% in 2014 and should remain close to 5% until 2017. The ratings also reflect the state's relatively high tax autonomy, in which proprietary revenues represented 70.5% of operating revenues in 2014, and the fact that the federal government remains the state's main creditor. The state's economy represents less than 5% of Brazil's.

The ratings also consider the proposed changes to the state's pension system including the gradual increase in the contribution rate for active employees and the creation of a complementary pension system. The proposed increase in the contribution must be approved by the local Legislative House (ALESC-Assembleia Legislativa de Santa Catarina). Once effective, these changes should translate into a minor increase in the state's operating margins in addition to prevent the actuarial pension deficit from growing.

Fitch expects the full increase in pension contribution rate will lead to savings up to 10% of the annual pension insufficiency that reached BRL2.7 billion in 2014. This insufficiency corresponds to almost 45% of the annual personnel payments. Given some reviews on the pension statistics, the consolidated actuarial deficit topped BRL118.2 billion in 2014, corresponding to 4.8x the state's operating revenues (7.5x in 2013). Fitch notes actuarial statistics vary and the size of the unfunded pension liability may change in the future.

The federal government remains the state's most relevant creditor, responsible for 57.5% of the state's consolidated debt. In Fitch's opinion, this condition implies federal support of the state in case of need. Financial debt represented 11.1 years of current balance in 2014 following some credit lines obtained with federal institutions in Brazil to finance the much needed investments in infrastructure and logistics.

Capex level should reach the equivalent to 8% of operating expenditures in 2015, comparing favourable among subnationals in Brazil but lower than its 'BBB-' peers across the region. Even considering the investment program of BRL10.5 billion until 2016, capex levels should remain at current levels. As a mitigating factor, Santa Catarina's adequate levels of infrastructure and relatively better social economic indicators than the Brazilian national average.

RATING SENSITIVITIES

Downgrade Factors: Any further negative action affecting Brazilian sovereign ratings could have a direct corresponding effect on the state's ratings. Moreover, should operating margins consistently fall below 5% negative review of the ratings would follow.

Upgrade Factors: Fitch does not expect to rate Santa Catarina above the Brazilian sovereign rating. The full adoption of corrective measures to ensure the long-term sustainability of Santa Catarina's proprietary pension system could lead to a positive review of the national scale rating.

KEY ASSUMPTIONS
The ratings and Outlooks are sensitive to these assumptions:

--Fitch assumes a strong level of sovereign support for the State of Santa Catarina given that the state's most relevant creditor is the Federal Government. Fitch's base case does not assume a severe change in Santa Catarina's key structural features.

--Fitch assumes that Brazilian Subnationals maintain international and domestic market access even if there is return of higher international financial volatility and further domestic confidence shocks.

Fitch affirms the following ratings:

State of Santa Catarina
--Foreign and Local Currency Long-Term IDR at 'BBB-'; Negative Outlook;
--Foreign and Local Currency Short-Term IDR at 'F3';
--National Long-term at 'AA-(bra)'; Stable Outlook;
--National Short-term rating at 'F1+'(bra)'.