Fitch Assigns First Time Ratings to Desenvolve SP
--Foreign Currency Long-Term Issuer Default Rating (IDR) 'BBB'; Outlook Negative;
--Local Currency Long-Term IDR 'BBB'; Outlook Negative;
--Foreign Currency Short-Term IDR 'F2';
--Local Currency Short-Term IDR 'F2';
--Long-Term National Rating 'AA+(bra)'; Outlook Stable;
--Short-Term National Rating 'F1+(bra)';
--Support Rating '2'.
KEY RATING DRIVERS
Desenvolve SP's ratings are equal to those of its controller, the State of Sao Paulo (ESP; IDR 'BBB'/Negative Outlook). Its Support Rating (SR) of '2' reflects the high probability of ESP providing support to Desenvolve SP if necessary. Fitch has not assigned a Viability Rating to Desenvolve SP, as it is an agency that focuses on development.
Desenvolve SP is strategically important for ESP, since it operates as a financing agent for the private sector and the municipalities. It also acts as a service provider/administrator of development funds, which are important for the State. In Fitch's opinion, Desenvolve SP's small size in relation to ESP's Gross Domestic Product (PIB) and budget lowers the cost of potential support and increases the State's capacity to support the agency. ESP's ratings are equal to those of the Federative Republic of Brazil rated 'BBB'/Negative Outlook (see 'Fitch Affirms the State of Sao Paulo's IDR at 'BBB'; Outlook Negative', dated July 9, 2015 at 'www.fitchratings.com').
Taking into account that it is a relatively new loan portfolio, Desenvolve SP's asset quality indicators were adequate. In 2014, loans classified as 'D-H' corresponded to adequate 5.4% of the total loan portfolio (6.8% in 2013). The agency has concentrated efforts on its control and collection policies with positive results. Loan concentration was adequate, with the 20 largest clients accounting for 36% of the total in 2014.
As a development agency, Desenvolve SP faces limitations to diversify its funding base. In 2014, the portfolio was financed with its own capital or with on-lendings from official entities. Desenvolve SP intends to diversify its funding by means of loans/on-lendings from international development institutions.
The agency is highly capitalized. ESP has historically distributed a large part of its dividends, and Fitch does not expect changes to this strategy. Due to the characteristics of a development agency, the interest charged on Desenvolve SP's loan operations are lower than those practiced by other institutions in the banking sector.
Desenvolve SP started its activities in 2009 under the name of Nossa Caixa Desenvolvimento - Agencia de Devenvolvimento do Estado de Sao Paulo S.A., with BRL1.0 billion of capital. Desenvolve SP is 99.9% controlled by ESP and its structure is lean, with nearly 166 employees its own as of March 2015. In terms of assets, the company ranks as the third largest agency in Brazil out 16 operating in the country. In the first quarter, Desenvolve SP reported BRL1.4 billion of assets, BRL 1.1 billion of equity and BRL 19.9 million of net income.
RATING SENSITIVITIES
Any changes to ESP ratings or in its capacity or willingness to support Desenvolve SP can lead to a rating review. Desenvolve SP's IDR mirrors the Negative Outlook of its controller. ESP had its Outlook revised to Negative following the review of the sovereign outlook for the Federative Republic of Brazil.
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