TEXT-Fitch rates Brazilian state of Santa Catarina 'BBB-'/'AA(bra)'

Tue Dec 11, 2012 3:48pm EST

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Dec 11 - Fitch Ratings has today assigned the following initial ratings for
the State of Santa Catarina (Santa Catarina):

--Foreign currency long-term rating at 'BBB-', Stable Outlook;
--Foreign currency short-term rating at 'F3';
--Local currency long-term rating at 'BBB-', Stable Outlook;
--Local currency short-term rating at 'F3';
--National long-term rating at 'AA(bra)', Stable Outlook;
--National short-term rating at 'F1+(bra)'.

RATING ACTION RATIONALE
The ratings are based on the fact that the economy of Santa Catarina represents
4.8% of Brazilian GDP, reflecting both its status as the eight-largest state in
Brazil and its above average operating margins (15.8% in 2011). Fitch believes
the state is challenged to defend its modest economic importance, given the
faster growth of other states in Brazil. The ratings also factor in the state's
relatively higher tax autonomy, the fact that it operates with significant tax
incentives granted to corporates, corresponding to roughly one-third of total
tax collections and its relatively higher tax payer concentration base.

Santa Catarina has revised its revenue growth for 2013 in light of the national
economic slowdown and the passing of adverse tax laws such as the national
unification of ICMS tax over imported goods at 4%, factors which also affect
some other subnationals. In Fitch's opinion, any adjustments will likely occur
on the side of expenditures but with limited room for reduction. The state faces
additional pressure on personal expenditures, which are very close to the
regulatory limits imposed by the Fiscal Responsibility Law (FRL).

In 2012, the state obtained permission to refinance BRL1.4 billion with foreign
currency denominated loan, payable in 10 years with one year grace period. This
refinance loan is related to a federal debt portion. As a result, total foreign
currency debts increased its share and should represent 16.5% of consolidated
debt (3.1% in June 2012), fully guaranteed by the Federal Government. The state
expects this deal to generate interest payment release to be mainly channelled
for investments. As verified with other states in Brazil, investment level has
been historically low (7.2% in the last five years), and should grow in
relevance.

Santa Catarina presents midrange indebtedness ratios in which financial debt
represented 1.1 year of operating balance in 2011 and should mildly increase in
2013. Moreover, the state's short-term liabilities amounted to 27.8% of total,
implying higher than average refinancing risk when compared to other states in
Brazil. Fitch expects this ratio to diminish as a result of the refinancing
loan.

As a sponsor to its proprietary pension system (IPREV), Santa Catarina made
monthly payments of BRL135 million (22.8% of personal expenditures) in 2011.
IPREV presents one of the highest actuarial deficits among Brazilian
subnationals (BRL133.5 billion) that must be funded by the state within 70
years. Current nominal benefits correspond to 104.9% of current wages, which
translates into increasing financial imbalances until 2025.

Santa Catarina's population of around 6.3 million in 2010 represents circa 3.2%
of the Brazilian population. Its industrial sector is considered well developed,
with a 34.4% stake of GDP, higher when compared to the Brazilian average of
23.4% in 2011.

RATING DRIVERS AND SENSITIVITIES - INTERNATIONAL AND NATIONAL RATINGS

Further increases in expenditures or inability to control personal expenses
could deteriorate Santa Catarina's operating performance, thus contributing to a
negative rating action. Operating margins below 5% and short-term liabilities
higher than 30% of total liabilities could also lead to a negative review of the
ratings.

Additional information is available on www.fitchratings.com. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (August 2012);
--'Local and Regional Governments Rating Criteria' (April 2012).

Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
International Local and Regional Governments Rating Criteria - Outside the
United States
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