OREANDA-NEWS. Fitch Ratings has assigned the Municipality of Sao Paulo (Sao Paulo) a long-term Issuer Default Rating (IDR) of 'BBB-'. The Outlook is Negative, reflecting the Negative Outlook assigned to Brazil on Oct. 15, 2015. Fitch has also assigned the municipality a National long-term rating of 'AA+(bra)', Stable Outlook.

KEY RATING DRIVERS
The ratings are based on Sao Paulo's higher-than-average operating margins which reached 10.6% in 2014. The ratings are also based on the fact that Sao Paulo is Brazil's wealthiest city, generating 10.3% of the Brazilian GDP in 2014, with above-average social and economic indicators.

The ratings reflect the implicit sovereign support Fitch believes Sao Paulo would have when it comes time to renegotiate its federal debt portion. It also considers that the change in the index over the Federal debt portion is effectively implemented and not vetoed by the Federal Government in early 2016; this would imply a relevant reduction in the outstanding amount of debt.

Fitch expects operating margins to be slightly lower by 2017, but still comparing favorably in relation to large states and cities in Brazil. Sao Paulo presents moderate fiscal autonomy, in which, in a growing trend, proprietary tax revenues corresponded to 54.2% of total revenues in 2014. Sao Paulo is in compliance with the Fiscal Responsibility Law, under which personnel related expenditures have been lower than 40%, well below the 60% limit.

Sao Paulo has been prohibited from raising new financial debt since 1998, since it was not in compliance with the 1.2x limit given its significant debt with the Federal Government. In 2014, total consolidated debt reached the equivalent of 1.95x of net current revenues, the highest among Brazilian cities and states.

The city's proprietary pension system, IPREM, had an actuarial deficit of BRL75.1 billion, which though high is equivalent to 2.1 years of the city's current revenues and better than local 'BBB-' rated peers. Sao Paulo is in the process of adopting corrective measures such as the creation of an actuarial balanced fund and the complementary pension scheme for those employees whose compensation surpasses the ceiling of the national system (INSS).

Sao Paulo has been investing on average 8.7% of total expenditures, which is lower when compared to the 'BBB-' peer average throughout the region (13.6%). Fitch believes the city should regain investment capacity in 2016 and 2017 when it will be able to enter into new credit agreements.

RATING SENSITIVITIES
Upgrade Factors: Fitch does not expect to rate Sao Paulo above the Brazilian sovereign rating. The adoption of corrective measures to provide long-term the sustainability of Sao Paulo's proprietary pension system could lead to a positive review of the National scale rating.

Downgrade Factors: Should the effect derived from the proposed change in the index over the federal debt portion materially diverge from that calculated by Sao Paulo a downgrade would be warranted. In addition, any further negative action affecting the Brazilian sovereign ratings could have a direct corresponding effect on the city's ratings.

KEY ASSUMPTIONS

The ratings and Outlooks are sensitive to these assumptions:

--Fitch assumes a strong level of sovereign support for Sao Paulo given that the city's most relevant creditor is the Federal Government.
--Fitch also assumes that the Federal Government will not veto the change in the index over the Federal Debt portion leading to a substantial reduction in the consolidated debt of Sao Paulo.

'Fitch assigns the following ratings to the city of Sao Paulo::

--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)'.