Latin Finance - January/February 2012 - 20

subnational finance

Surer Footing
by Paul Kilby io de Janeiro has quietly undergone a financial transformation of sorts over the last few years, increasing revenues and putting its debt profile on a more sustainable footing. Its resilience during the last global financial crisis was touted as one of the reasons it won the bid to host the Olympic Games in 2016, and today the city is generating more investable cash than ever. Firmly positioned as an investment grade borrower, and with its fiscal house in order, the city is now looking to lure more financial exchanges and investors to Rio de Janeiro (See Box). Treasury officials also want to issue in the international bond market, if the federal government ever loosens restrictions on subnational debt issuance. “After years of a process of socioeconomic deterioration, Rio recovered its investment capacity and, increasingly, is being able to attract investors and financing,” says Eduarda La Rocque, who became the city’s finance secretary in 2009 after working as a partner at Banco BBM. The turnaround required what La Rocque describes as a “management shock” that sought efficiencies in public spending and ultimately resulted in the city’s largest primary surplus in a decade, the equivalent of 12% of revenues in 2009. In early December 2011, Moody’s upgraded the municipality to Baa2 from Baa3, only to be followed later that month by Fitch which assigned an initial BBB rating to the borrower. Improved debt servicing abilities, along with strong revenue growth from an increasingly diversified economy and improved tax collection, were all cited as reasons for Rio’s investment-grade status. The municipality has undertaken a number of measures to manage its debt after entering a refinancing agreement with the federal government in 1999, when it agreed to pay 2.653 billion reais in

Rio de Janeiro is in better fiscal shape than ever. Finance Secretary Eduarda La Rocque talks to LatinFinance about the city’s turnaround story.
[with the federal government] through the World Bank loan, we got longer and cheaper money,” La Rocque tells LatinFinance. Through this restructuring, the city has lowered rates from an annual 9% plus the general market index (IGP-DI) to plus 7.5% and then to plus 6% after the second $545 million World Bank disbursement in November. According to Fitch, that plus 6% remains expensive, but Rio is still in better shape than most subnational borrowers, with debt servicing levels lower than its international peers with a BBB rating. Nevertheless, a good portion of its debt is tied to fluctuations in the IGP price index, and the restructuring also increased the city’s exposure to FX fluctuations as the World Bank loan is denominated in dollars. According to Moody’s, foreign currency debt is now around 22% of direct debt versus just 9% in 2009, a risk that the city is looking to hedge. According to La Rocque, Rio has not exercised an option embedded in the loan that allows it to convert to reais because the interest rate differential against the US dollar is too punitive. For now, there is little urgency to hedge. That’s because the loan amortization schedule during the first eight years is relatively smooth, reducing Rio’s immediate cash exposure to any devaluation of the real. The city’s total debt now stands at 8.6 billion reais ($4.6 billion), of which 5.9 billion reais is still owed to the federal government. But the World Bank loan, its largest ever to any city, freed up $300 million in yearly savings since it was

Expanding investment capacity: La Rocque monthly installments until 2029. The move made the federal government the municipality’s largest creditor, representing some 69% of its debt, with the added flexibility of being able to capitalize such payments if it so wished, according to Fitch. With the support of the World Bank, the city also started implementing what it calls its medium-term expenditure framework (MTEF), a budget designed to match its fiscal and spending resources.

A Better Debt Profile

In November, it drew down the second part of a two-tranche $1.045 billion loan due 2040 from the World Bank that further extended maturities and cut debt costs. “By amortizing 20% of our debt

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January/February 2012

Latin Finance - January/February 2012

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