Fitch Downgrades Six Brazilian Subnationals; Outlook Negative

Fitch Ratings has downgraded the states of Sao Paulo, Santa Catarina and Parana's Issuer Default Rating (IDR) to 'BB' from 'BB+'. Fitch has also downgraded the ratings for the cities of Sao Paulo and Rio de Janeiro to 'BB' from 'BB+'. In addition, Fitch has downgraded the IDRs for the state of Rio de Janeiro to 'B+' from 'BB'. The Rating Outlooks remain Negative.

KEY RATING DRIVERS - IDRs

The rating actions follow the recent downgrade of Brazil's ratings to 'BB' from 'BB+'(see "Fitch Downgrades Brazil to 'BB'; Outlook Negative", dated May 05, 2016.

Considering the features of the Brazilian institutional framework, Fitch does not believe any subnational entity to be rated higher than the sovereign. This is the case of Sao Paulo (state and city), and the city of Rio de Janeiro, Parana and Santa Catarina, whose ratings were equalized with the sovereign at 'BB'.

The state of Rio's downgrade reflects its worse than expected fiscal deterioration, with more than anticipated reliance on non-recurring revenues. Fitch believes Rio de Janeiro to be incurring further leverage on the implicit support from the Brazilian federal government when it comes to the federal debt portion payment.

RATING SENSITIVITIES - IDRs

The IDRs of the seven Brazilian subnationals should move in tandem with Brazil's sovereign ratings. They would be affected by further changes in the sovereign ratings or Outlooks and/or in the government's willingness to provide support. Nevertheless, Fitch does not expect a change in the government's willingness to provide support for subnational debt if needed.

KEY ASSUMPTIONS

The ratings and Outlooks are sensitive to these assumptions:

--Fitch assumes a strong level of sovereign support for the Brazilian states and large cities given that their most relevant creditor is the federal government.

--Fitch assumes that Brazilian states maintain international and domestic market access even during periods of higher international financial volatility and further domestic shocks.

--Fitch expects some delays in progress on the government's legislative agenda, especially the items affecting subnationals.

Fitch has taken the following rating actions:

State of Sao Paulo:

--Long-Term Foreign and Local Currency IDRs downgraded to 'BB' from 'BB+'; Outlook Negative;

--Short-Term Foreign and Local Currency IDRs affirmed at 'B'.

City of Sao Paulo:

--Long-Term Foreign and Local Currency IDRs downgraded to 'BB' from 'BB+'; Outlook Negative;

--Short-Term Foreign and Local Currency IDRs affirmed at 'B'.

City of Rio de Janeiro:

--Long-Term Foreign and Local Currency IDRs downgraded to 'BB' from 'BB+'; Outlook Negative;

--Short-Term Foreign and Local Currency IDRs affirmed at 'B'.

State of Santa Catarina:

--Long-Term Foreign and Local Currency IDRs downgraded to 'BB' from 'BB+'; Outlook Negative;

--Short-Term Foreign and Local Currency IDRs affirmed at 'B'.

State of Parana:

--Long-Term Foreign and Local Currency IDRs downgraded to 'BB' from 'BB+'; Outlook Negative;

--Short-Term Foreign and Local Currency IDRs affirmed at 'B'.

State of Rio de Janeiro:

--Long-Term Foreign and Local Currency IDRs downgraded to 'B+' from 'BB-'; Outlook Negative;

--Short-Term Foreign and Local Currency IDRs affirmed at 'B'.