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Rating Action:

Moody's downgrades Minas Gerais' issuer rating to B1 from Ba3, outlook remains negative

 The document has been translated in other languages

30 Jun 2016

New York, June 30, 2016 -- Moody's Investors Service ("Moody's") today downgraded the global scale issuer rating of the Brazilian state of Minas Gerais to B1 from Ba3, the outlook is negative.

RATING RATIONALE

The downgrade reflects the rapid and ongoing deterioration of the state's fiscal position. Continuing revenue decline and a rigid cost structure has translated into weak credit metrics that no longer compare favorably with rated peers.

The negative outlook reflects Moody's expectation that under Brazil's current economic environment, the state's credit metrics and poor liquidity position will deteriorate further. By year end 2015, the state had accumulated payment arrears equivalent to 8% of total revenues compared with 5% a year earlier. Moody's expects Minas liquidity position will remain strained over the next 12 to 18 months.

Minas total deficit reached 14% of total revenues in 2015 from 3% in 2014. The deficit has further widened in the four months to April 2016 as expenditure growth materially outpaced revenue growth. The state of Minas Gerais faces a very rigid cost structure whereby it devotes around 63% of total expenses to personnel costs, including pension-related payments. Minas' fiscal position will rely increasingly on a return to tax revenues growth which Moody's does not expect to recover before year-end 2017.

The state of Minas Gerais has the highest debt levels for rated Brazilian states with net debt to operating revenues of 188% as of 30 April 2016. Moody's notes that the state will receive some liquidity relief coming from a recent measure to support states announced by Brazil's federal government. Debt owed to the federal government (69% of total sub-sovereign debt in Brazil and 73% in the case of Minas Gerais) will have an extended maturity profile. In addition, Brazilian states are allowed a 6 month debt servicing pause under those obligations. Moody's expects that those measures will save Minas around BRL 1.8 billion (i.e 2% of 2015 total expenses) in debt service payments until January 2017 when debt will progressively resume its amortization schedule.

Moody's understands that Brazil's federal government, the state's primary creditor and guarantor of all state foreign debt obligations, remains committed to supporting states under severe liquidity strains through a number of policy measures such as the one described above.

WHAT COULD CHANGE THE RATING UP/DOWN

Given the negative outlook a rating upgrade is unlikely in the near term. A stable outlook could result from marked improvements in Minas' fiscal position. A downgrade of Brazil's sovereign bond rating could result in a downgrade. Further deterioration of the state's credit metrics and/or evidence of any weakening of the willingness of Brazil's federal government to continue supporting the states would also lead to a further downgrade of the state of Minas Gerais.

The principal methodology used in this rating was Regional and Local Governments published in January 2013. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com.br for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com.br for additional regulatory disclosures for each credit rating.

Paco Debonnaire
Analyst
Sub-Sovereign Group
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

David Rubinoff
MD - Sub-Sovereigns
Sub-Sovereign Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
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Moody's downgrades Minas Gerais' issuer rating to B1 from Ba3, outlook remains negative
No Related Data.
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