Fitch Assigns First-Time Rating to AgeRio of 'BBB-'; Outlook Stable

Fitch Ratings has assigned the following ratings to Agencia de Fomento do Estado do Rio de Janeiro S.A. (AgeRio):

--Foreign and Local Currency Long-Term Issuer Default Rating (IDR): 'BBB-', Outlook Stable;

--Foreign and Local Currency Short Term IDR: 'F3';

--Long-Term National Rating: AA-(bra), Outlook Stable;

--Short-Term National Rating: 'F1+(bra)';

--Support Rating (SR): '2'.

KEY RATING DRIVERS

AgeRio's ratings are based on the expected support from its parent, the State of Rio de Janeiro (ERio, Long Term IDR: 'BBB-'; Stable Outlook). AgeRio's SR of '2' reflects Fitch's view that the probability of support would be high, in case of need. Fitch does not assign a Viability Rating to AgeRio, as it is a development agency. In turn, ERio's ratings are based on its relatively diversified economy and implicit support from the federal government.

Fitch aligns AgeRio's ratings with those of ERio. This reflects Fitch's view that AgeRio is strategically important for ERio, acting as its development arm and implementing its economic development policies. ERio controls 99.99% of AgeRio and, by state law, its stake in AgeRio's voting shares cannot fall below 51%, and it is the financial agent or administrator of three state funds. A track record of frequent capital injections by ERio reinforces this view. According to Fitch, AgeRio's small size in relation to the GDP and the budget of ERio, makes the cost of potential support relatively low and increases ERio's propensity to support AgeRio.

AgeRio's strategy is aligned with ERio's economic policies. Its objective is to contribute to the implementation of ERio's economic policies through short- and long-term financial support to the industrial, agribusiness, tourism and services sectors within the state. AgeRio implements its strategy via three distinct forms: lending to the private sector and municipalities, investments, and offering services as a financial agent/administrator of three funds owned by ERio. As of June 30, 2014, 96% of loans were to the private sector.

AgeRio's track record for asset quality is relatively weak, but the recently implemented changes to credit risk policies and controls should lead to some improvement. Impaired loans (loans in the D-H risk category) have fallen gradually from a peak of 34% of gross loans in 2011, in part, due to large chargeoffs in the subsequent periods. As of June 30, 2014, impaired loans corresponded to a still high 7.98%. The loan book is also highly concentrated, with the top 10 clients making up 71% of the total.

As a development agency, AgeRio has relatively limited scope to diversify its funding base. As of June 30, 2014, funding was composed of on-lending lines from Banco Nacional de Desenvolvimento Economico Social (BNDES) and FINEP (a public entity subordinate to the Ministry of Science, Technology and Innovation), which corresponded to 45% and 4% of total loans, respectively. The rest of the loan book was funded by its equity. AgeRio aims to diversify its funding by borrowing from international development institutions.

AgeRio is very highly capitalized and has significant room for growth. As of June 30, 2014, its Fitch core capital (FCC) ratio was 85.67%. There are no restrictions with respect to withdrawal of capital or dividends. Historically ERio has reinvested all the dividends back in AgeRio, which does not expect a change in ERio's strategy.

RATING SENSITIVITIES

Changes in Parental Support: Changes in ERio's ratings or willingness to provide support to AgeRio, or in Fitch's evaluation of AgeRio's strategic importance to its parent, would result in changes in AgeRio's ratings.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);

--'National Scale Ratings Criteria' (Oct. 30, 2013);

--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

National Scale Ratings Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=935635

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