OREANDA-NEWS. Fitch Ratings has downgraded the Long-Term National Rating of Agencia de Fomento do Estado de Sao Paulo - Desenvolve SP (Desenvolve SP) to 'AA(bra)' from 'AA+(bra)' and revised the Rating Outlook to Stable from Negative. In addition, Fitch has affirmed the institution's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BB'. The Outlook for the IDRs remains Negative, reflecting the Negative Outlook assigned to the State of Sao Paulo.

A full list of ratings actions follows at the end of this press release.

KEY RATING DRIVERS

The rating actions on Desenvolve SP follow those taken by Fitch on Sao Paulo, its main controlling shareholder, on July 27, 2016. The downgrading of the state's Long-Term National Rating follows the successive downgrades of the Brazilian sovereign in the last six months. On the other hand, the affirmation of Sao Paulo's IDRs reflects its strong economy, which accounts for approximately one third of the Brazilian Gross Domestic Product (GDP). The ratings are based on the state's adequate budget performance, when compared to its peers in the same rating category, and greater fiscal autonomy, when compared to other Brazilian states. The ratings also factor in that the Federal Government is Sao Paulo's main creditor.

Desenvolve SP's IDRs and National Ratings are aligned with those of Sao Paulo. The Support Rating (SR) of '3' reflects the moderate probability of Sao Paulo providing support to Desenvolve SP, if necessary. Fitch does not assign a Viability Rating to Desenvolve SP, since it is a development agency.

Fitch views Desenvolve SP as strategically important for Sao Paulo, with which it is strongly integrated and where it operates mainly as a financing agent to the private sector, always with a development bias, and to the state's municipalities. Desenvolve SP also operates as a service provider/administrator of development funds, which are important to the state. The modest size of the development agency relative to GDP and Sao Paulo's budget reduce the cost of potential support from the government and increase the state's capacity to support the company, in Fitch's opinion.

Desenvolve SP has been showing deterioration in its credit quality indicators. In March 2016, 'D-H' credits were 12.3% (9.7% in 2015, 5.4% in 2014 and 6.8% in 2013), a ratio compatible with its operating profile. The company has concentrated its efforts on its control and collection policies. Credit concentration was acceptable, with the 20 largest clients accounting for 32% of the total in 2015 (37% in 2014).

As a development agency, Desenvolve SP has encountered constraints in diversifying its funding base. historically The credit portfolio has been financed, in its majority, with the company's own capital or with onlendings from official entities such as the National Economic and Social Development Bank (BNDES) and Finep - Studies and Projects Financier. The agency intends to diversify its funding with loans/onlendings from international development institutions.

Desenvolve SP is highly capitalized, and has historically distributed a large part of its dividends; Fitch does not expect changes to this strategy. Due to the characteristics of the development agency, the interest rates charged in its credit operations are lower than those offered by institutions in the banking sector.

RATING SENSITIVITIES

Any changes to the state of Sao Paulo's ratings, or to its capacity or willingness to provide support to Desenvolve SP can lead to a revision of the institution's ratings. Desenvolve SP's IDRs carry the Negative Outlook of Sao Paulo.

Fitch has taken the following rating actions:

-- Long-Term Foreign and Local Currency IDRs affirmed at 'BB'; Outlook Negative;

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

-- Supporting Rating affirmed at '3';

-- Long-Term National Rating downgraded to 'AA(bra)', from 'AA+(bra)'; Outlook revised to Stable from Negative;

--Short-Term National Rating affirmed at 'F1+ (bra)'.