Effect on ratings with S&P Brazil outlook

S&P's revised outlook on the Brazil sovereign, and a potential rating downgrade, affects most Brazilian corporates, but not all. S&P rates most non-sovereign entities at the lower of each credit's local currency rating and the S&P transfer and convertibility (T&C) assessment for the country. 

The T&C is the rating associated with the likelihood of the sovereign restricting access to foreign exchange needed for debt service. The T&C can be up to 3 notches above the sovereign rating. In the case of Brazil, S&P assigns a T&C rating of BBB+, two notches higher than the sovereign foreign currency rating of BBB-.

"The effect on corporates of the sovereign change in outlook this week depended on whether each corporate is rated with respect to the T&C rating, the sovereign rating, or neither and, for those that are rated with respect to the T&C, whether they were at their maximum notching vs. the T&C", says Barclays.

The effect of a potential downgrade to S&P's sovereign rating on domiciled corporates depends on these factors, as well as whether S&P downgrades the T&C along with the foreign currency rating. 

Since the T&C rating has been consistently two notches above the sovereign rating since the inception of the T&C methodology in 2005, and since the T&C was lowered from A- to BBB+ when the sovereign was downgraded from BBB to BBB-, we think that the T&C rating would be lowered from BBB+ to BBB if S&P moves Brazil's foreign currency rating to BB+. This would affect corporates rated with respect to the T&C, including companies such as Vale.