Fitch: Brazilian State SPVs on Unpaid Taxes Hold Specific Risk

NEW YORK--(BUSINESS WIRE)-- The special purpose vehicles (SPV) several Brazilian state governments have set up to issue debt backed by unpaid taxes ("divida ativa" in Portuguese) hold some important risks, Fitch Ratings says. In general, debt issued by special purpose vehicles like these carry the private sector risk of the underlying assets. However, these vehicles also have embedded political risk. Tax debt restructuring programs may offer generous writedowns of both the past due taxes and fines. If that happens, states would need to add assets to the SPV to maintain the cash flows.

Rio de Janeiro (BBB-/Negative) created the most recent SPV. Others states should follow. Rio has approximately BRL66 billion (USD20.61 billion) in unpaid taxes and has been able to collect only BRL350 million (0.5% of the unpaid amount) per year. This modest recovery rate can be mainly explained by the reluctance to write down the debt, which overstated the amount of tax in arrears and the poor collection efforts. Rio de Janeiro estimates it could issue up to BRL4.5 billion (USD1.41 billion) in debentures backed by unpaid taxes.

Under the International Accounting Standards Board, Brazilian states should account for unpaid taxes that are unrecoverable. Many are related to long legal disputes with companies that are no longer in business. Santa Catarina (BBB-/Negative) is one example. 99.5% of its BRL10.3 billion (USD3.22 billion) in unpaid taxes is considered unrecoverable in the short term.

The state of Sao Paulo (BBB/Negative) has segregated the amount of unpaid taxes into two main categories. One holds taxes due from companies that are operational. These tax receivables accounted for 36.5% of total amount of BRL279 billion (USD92 billion) as of April 2015. Inactive companies accounted for 54.8%. The remainder is due individuals. Fitch expects unpaid taxes to be repaid by active companies at the highest rate.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20150722006066/en/

Fitch Ratings
Paulo Fugulin
Director
International Public Finance
+55 11 4504-2206
or
Humberto Panti
Senior Director
International Public Finance
+52 81 8399 9100
or
Rob Rowan
Senior Director
Fitch Wire
+1 212-908-9159
or
Media Relations
Sandro Scenga, +1 212-908-0278
[email protected]

Source: Fitch Ratings

You May Also Be Interested In

• HTX Research Examines U.S. AI Equities: Technology Remains Early, While Capital Expenditure and Valuations Have Entered the Late Cycle
• How Minecraft's Creator Economy Keeps Growing After 17 Years
• Last Chance to Join the Apeing Whitelist Before This Upcoming Crypto Coin Rivals Monero and Ethereum