Fitch Downgrades AgeRio Following Action on Parent; Outlook Stable
OREANDA-NEWS. Fitch Ratings has downgraded Agencia de Fomento do Estado do Rio de Janeiro S. A.'s (AgeRio) Long-Term Local and Foreign Currency Issuer Default Ratings (IDRs) to 'B-' from 'B+', Long-Term National Ratings to 'BB-(bra)' from 'A-(bra)' and Support Rating to '5' from '4'. Fitch also removed the Rating Watch Negative assigned to Agerio's ratings on May 31, 2016, and assigned a Stable Rating Outlook to the Long-Term IDRs and Long-Term National Rating. A full list of rating actions follows at the end of the release.
KEY RATING DRIVERS - IDRS, NATIONAL RATINGS, SUPPORT RATINGS
The rating action mirrors the recent action on Agerio's parent, the State of Rio de Janeiro (ERio, Long-Term Foreign Currency and Local Currency IDRs 'B-'/Outlook Stable). (See 'Fitch Downgrades State of Rio de Janeiro to 'B-'; Resolves Negative Watch', dated June 15, 2016 at 'www. fitchratings. com' for more details.)
AgeRio's ratings are driven by expected support from ERio and aligned with those of its parent. Fitch does not assign a Viability Rating to AgeRio, as it is a development agency and therefore cannot be assessed on standalone basis.
Fitch views AgeRio as strategically important for ERio, as it acts as the state's development arm and implements its economic development policies. A track record of frequent capital injections by ERio, most recently in the second half of 2015, reinforces Fitch's view. ERio controls 99.99% of AgeRio. Furthermore, by state law ERio's stake in AgeRio's voting shares cannot fall below 51%, and it is the financial agent or administrator of three state funds.
As of December 2015, AgeRio remained highly capitalized with a total regulatory capital ratio of 75.30% (70.95% in December 2014). Fitch believes that, under a stress scenario, ERio might need to withdraw part of the excess capital at AgeRio, which would lead to a decline in the development agency's loss absorption capacity.
In 2015, AgeRio's overall profitability fell but remained adequate, as a solid increase in fee income broadly offset a large increase in loan impairment charges. Average ROA stood at 1.07% (1.49% in December 2014). In the same period, AgeRio's impaired loans classified in the D-H range of the central bank's risk scale rose to 6.54% of total loans (5.37% in December 2014), while impaired loan coverage by reserves rose significantly to 223.9% (89.67% in December 2014). Fitch expects loan impairment charges to remain high throughout 2016 as a result of the continued weakness in the operating environment in ERio that is undermining the credit worthiness of AgeRio's borrowers.
RATING SENSITIVITIES
IDRS, NATIONAL RATINGS, SUPPORT RATINGS
Changes in Parental Support: AgeRio's ratings are linked to those of ERio. Any further changes in ERio's ratings would lead to a review of AgeRio's ratings.
Fitch has taken the following rating actions:
--Foreign and Local Currency long-term IDRs downgraded to 'B-' from 'B+', Outlook Stable;
--Foreign and Local Currency short-term IDRs affirmed at 'B';
--Long-term National Rating downgraded to 'BB-(bra)' from 'A-(bra)', Outlook Stable;
--Short-term National Rating downgraded to 'B(bra)' from 'F1(bra)';
--Support Rating downgraded to '5' from '4'.
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