Fitch: Brazilian LRG Loan Extension May Hold Long-Term Cost

NEW YORK--(BUSINESS WIRE)-- The proposal to extend the maturities of debts owed by Brazilian local and regional governments (LRGs) to the Brazilian federal government would provide short-term financial relief to LRGs. However, that relief could come at the cost of implementing structural changes and maintaining higher levels of outstanding debt, Fitch Ratings says.

The proposal would allow states and the Federal District to extend their loan maturities by 20 years to 2047. The loans the LRGs owe to Banco Nacional do Desenvolvimento Economico e Social (BNDES) would also be extended by 10 years with a four-year grace period. The federal government is expected to formally propose this plan to the Brazilian Congress in the coming days. How long it might take Congress to consider it is unclear.

If it is approved quickly, the proposal may help address some of the financial stress that Brazilian LRGs face due to lower tax revenues, rising personnel expenditures and the national recession. We expect their fiscal performance to remain stressed until 2017. Operating margins for the 12 Fitch-rated LRGs are forecast to fall to 3.7% in 2016 from 4.6% in 2015, which may lead to further downgrades.

Fitch estimates that the proposal would affect at least BRL569 billion (USD153 billion), or 81% of the debt held by all LRGs. According to the Ministry of Finance, the financial relief would reach an aggregate of BRL12 billion (USD3 billion) in 2016. LRGs would gain an additional relief of BRL11.4 billion (USD2.8 billion) in 2017 and BRL13.4 billion (USD3.3 billion) in 2018. We also believe this proposal would improve the relationship between the LRGs and the federal government. The federal government's support of LRGs is implicit.

While this proposal would postpone debt payments and lower LRG cash flow requirements in the near term, we believe one part of the proposal that would approve additional foreign borrowing in 2016 could make Brazilian LRGs more vulnerable to external shocks. Foreign credit exposure rose to 14.4% of all LRG debt in 2015, up from 11.2% in 2014 on the rise in the US dollar.

The proposal would also require LRGs to follow federal recommendations on tax collections and expenditures, adopt pension standards and sell some assets. LRGs may have trouble complying with expenditure controls, as they increased headcount by 12% in 2015 alone. Local tax collections may also be difficult to manage in a recessionary environment. They expanded by a weak 3% in 2015 and, as the recession continues, they will likely expand similarly in 2016.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160310006324/en/

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Source: Fitch Ratings

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