OREANDA-NEWS. March 23, 2016. Fitch Ratings has revised the Rating Outlook on Agencia de Fomento do Parana S.A.'s (FP) Long-Term National Rating to Stable from Negative. At the same time, Fitch has affirmed FP's long-term National Ratings and Issuer Default Ratings (IDRs). The Outlook on the IDRs remains Negative.

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

Key Rating Drivers
The rating actions on FP follow the same actions taken on its controlling shareholder, the State of Parana (EPR). The revision of the Outlook for the Long-Term National Rating and the affirmation of EPR's ratings reflect its better than previously forecast revenue generation, after the state implemented a tax increase approved at the end of 2014. EPR's operating margin, according to adjustments made by Fitch, reached 4.9%, factoring in the adoption of a few measures to curb expenses and improve revenues to a sustainable level.

FP's IDRs and National ratings are equal to those of EPR, reflecting the expectation of institutional support from its controller. FP belongs to EPR and its mission is to foster the development of the region and its 399 municipalities. For this purpose, it manages state development funds, giving support to sectors considered strategic for the government. Fitch considers FP strategic for EPR, since it is part of the public policies implemented by the entity.

The Negative Outlook on FP IDRs also follows that of EPR, which, in turn, follows that of Brazil's sovereign rating. The Negative Outlook on Brazil's IDRs highlights the continued uncertainties and negative risks related to the country's economic, fiscal and political developments.

A large part of FP's credit portfolio relies on good guarantees, given its strong relationship with the state municipalities (responsible for 78% of the total portfolio) and the fact that it operates with attractive rates. However, despite still being good, the credit quality showed significant deterioration in June 2015, as a result of FP's strategy to increase the private credit (microcredit and financing to micro, small and medium-size companies). Non-performing loans (classified as D-H) increased to 3.3% in June 2015, from 0.9% in December 2014 and require attention in view of the deteriorated local economic environment. Loan loss coverage has decreased strongly and was only 64% in June 2015, against 118% in December 2014 and 184% in 2013.

Delinquency control is key for the maintenance of FP's results, in view of its reduced margin. FP's profitability/net equity (6% in June 2015) is adequate as far as being a development agency, with interest rates charged on credit operations lower than those practiced by traditional institutions in the banking sector. Furthermore, FP operates nearly completely with its own funds and low leverage (net equity/total liabilities: 91%), which explains the high return on assets (ROA: 5.4%). According to local rules, FP cannot capture deposits and financial bills.

Given the low leverage, the regulatory capital ratios and Fitch's core capital are very high (77.1% in June 2015), without intangible assets and subordinated debts. FP was recapitalized with BRL150 million in 2014 after a BRL150 million capital withdrawal in 2013.

Rating Sensitivities
Any changes to EPR's ratings, its propensity to support FP, or in Fitch's evaluation of the agency's strategic importance for the controller can result in rating revisions.

FULL LIST OF RATING ACTIONS:
Fitch has affirmed the following:
-- Long-Term Foreign and Local Currency IDRs at 'BB+'; Outlook Negative;
-- Short-Term Foreign and Local Currency IDRs at 'B';
-- Support Rating at '3';
--Long-Term National Rating at 'AA(bra)'; Outlook revised to Stable from Negative;
--Short-Term National Rating at 'F1+ (bra)'.