February 26, 2013 / 7:15 PM / 5 years ago

TEXT - Fitch says Brazilian borrower change highlights regulatory need

Feb 26 - Fitch believes Brazilian states will begin to borrow from more
domestic private banks and international investors in the near term and those
lenders should be aware of important regulatory conditions and pension
obligations. In our view, state financing will increasingly be provided 
by those investors because the traditional domestic creditors such as Banco 
Nacional do Desenvolvimento Economico (BNDES), Caixa Economica Federal (CEF), 
and Banco do Brasil (BdB), are reaching their statutory lending limits with 
negative implications for the gross federal debt. In addition, most multilateral
and supranational agencies are also approaching their Brazilian lending limits.

We believe one particular regulatory condition is important to understand. The 
Brazilian federal government guarantees all external debt and the country's 
treasury constantly monitors states' creditworthiness. Theoretically, states 
that are rated too low on this scale can neither receive guarantees nor enter 
into new credit agreements. However, we believe that in practice states from all
rating classes are eligible to receive guarantees and may raise new funding. In 
our view, the lending environment would be improved if this process was more 
transparent.

We also believe lenders should be aware of the deficit that each state's 
proprietary pension system (RPPS) is running. Many states must cover them in the
short term, embedding refinancing risks. We expect deficits to arise more often 
in the future as decreases in the proportion of active over inactive employees 
and pensioners. This is mitigated by the adoption of defined contribution plans 
and migration of beneficiaries to balanced funds. These enhancements are still 
pending for most plans, since the implementation costs are high and some states 
may not be able to afford them.

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