State of Minas Gerais

This report does not constitute a rating action. Overview Credit context and assumptions Base-case expectations Minas Gerais is seeking to adhere to Brazil?s Fiscal Recovery Regime due to its important structural fiscal weaknesses. From a relatively stronger position due to extraordinary fiscal support in 2020 and the economic rebound in 2021, cash flow margins will become tighter in the next two years. A favorable legal injunction allows Minas Gerais to stop debt service payments to the federal government and to block the triggering of counter-guarantees. The legal injunction combined with a temporary salary freeze and higher tax collection will result in fiscal surpluses in 2021. The state continues to be in default due to lack of evidence of debt service

...We expect nonpayment events to continue to happen until the state reaches an agreement with the federal government to join the Fiscal Recovery Regime. Since 2018, Minas Gerais' debt service with financial institutions has been met by federal government guarantees. Guarantees specifically granted to loans between multilateral institutions and the state of Minas Gerais lack a definitive timeframe. We haven't seen proof of timely payment to multilaterals (within five business days of the due date), resulting in events of selective default. We expect an extremely low debt service coverage ratio because of strained liquidity and cash flows. The state lacks available free cash, and because of a weak budgetary performance we think liquidity will remain structurally weak....

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