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April 19 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has today assigned the following initial ratings to Agencia de Fomento do Parana (FP):
--Foreign and local currency long-term Issuer Default Ratings (IDRs) of ‘BBB-'; Outlook Stable;
--Foreign and local currency short-term IDRs of ‘F3’;
--Support Rating of ‘2’;
--Support Rating Floor of ‘BBB-';
--National long-term rating of ‘AA+(bra)'; Outlook Stable;
--National short-term rating of ‘F1+ (bra)'.
KEY RATING DRIVERS - IDRS AND NATIONAL RATINGS
The IDRs and national scale ratings of FP are equalized to those if it’s controlling shareholder (State of Parana; long-term IDR ‘BBB-', Outlook Stable). FP is the financial agent of the state of Parana, the administrator of state development funds and the finance arm of the state towards fostering economic growth in its home region.
FP is mostly funded by the equity provided by its controlling shareholder and is engaged in long and medium term financing for the state’s municipalities. Daily operations are also somehow integrated with several state departments. In Fitch’s view, these characteristics results in a high probability of support from the state and hence explain the current Support Rating (‘2’) and Support Rating Floor (‘BBB-').
The ratings assigned to Parana, the fifth largest state in Brazil, are based on its modest economic importance (it is responsible for 5.8% of the country’s GDP), a well-balanced pension fund system, and its financial flexibility, attributable to the fact that the state’s largest creditor is the federal government, accounting for 69.4% of its total debt at fiscal year-end (FYE) 2012. The ratings also consider the state’s relatively greater tax autonomy and the fact that it grants significant tax incentives to the private sector.
As with other government institutions, the strategies, goals, and leadership of FP can be influenced by shifts in the political environment and, as a result, experience change.
The institution has good asset and credit ratios with low charge-offs. According to Fitch, the very low delinquency is explained by the fact that a large part of the portfolio is directed to municipalities in Parana, which rely on their participations in the fund granted by the tax collection of products and services (ICMS), known as the Fundo de Participacao do Imposto sobre Circulacao de Mercadorias e Servicos. Despite the good cushion provide by its capital, Fitch believes that a greater level of provisioning would be prudent given the state’s plans to achieve a higher share of micro finance in their portfolio until 2015. .
As FP’s mission and objective is development of the Parana economy, the institution works with a lower loan interest rate than those practiced in the banking sector. As a result, Fitch believes that its return on equity (ROE) should remain at historical levels, around 7%, during 2013.
FP has historically displayed high quality capital, mainly composed by Tier I instruments. The tangible common equity/tangible assets ratios are very satisfactory (96.6% in December 2012 and 96.3% in December 2011). Therefore, FP presents high capitalization levels that should diminish in the coming periods as the institution searches for new funding sources and increases its loan portfolio.
RATING SENSITIVITIES - IDRS AND NATIONAL RATINGS
Changes in Parana’s ratings or in its propensity and willingness to provide support to FP could directly affect the development agency’s ratings.
Created by state law in 1999, Fomento Parana is controlled by the state of Parana with the mission to support the economic and social development of state.
In 2012, Fomento Parana presented total assets of BRL1.3 billion (USD650 million), net worth of BRL1.3 billion (USD650 million) and net income of BRL90.5 million (USD45.2 million).