Luiz Tess e Marianna Waltz CA Finanças SP 16 04 14

Brazil: Outlook and Corporate Ratings Luiz Tess , Diretor Geral – Brazil Marianna Waltz, Associate Managing Director – LATAM Corporate Finance

ABRIL 2014

Content I.

Moody’s Local Presence in Latin America and Brazil

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Brazil’s sovereign rating history

1.

A challenging g g environment

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Post QE and tighter funding conditions for LatAm

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Brazil: below-trend growth, high inflation and negative investor sentiment

2 2.

Brazil: credit quality still holds

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Sovereign considerations

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Adequate liquidity and debt profile, but expansion plans could be hurt

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Sector overview: mixed trends

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I

I Moody’s Local Presence in Latin America and Brazil

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Moody’s Presence in Latin America and Brazil » 3 Moody’s subsidiaries in the region, fully recognized by local regulators » Mexico City, Mexico (covering Northern Latin America – Mexico, Central America, Venezuela &

Colombia) » Buenos Aires, Argentina (covering Southern Cone and Andean Countries ex-Colombia) » São Paulo, Brazil

» Moody’s in Brazil: 55 full time employees in two legal entities » Moody’s Analytics: Software, Quantitative Advisory Services & Research in Financial Risk

Management; » Moody’s América Latina Ltda: CVM registered Rating Agency established in 1997 » Analytical Staff of 25 Analysts and Associate Analysts » > 260 rating relationships with Corporates, Banks, Insurance Companies, Infrastructure

Companies, Project Finance Issuers, Regional Governments and Issuers of Asset Backed Securities. » Leading Provider of Asset Management Quality Assessments

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Latam Sovereign Credit Quality has Strengthened LatAm 5 Ratings History

Government of Brazil: LT Issuer Rating (2000 – 2014)

Source: Moody’s

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1

A Challenging Environment

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Fed’s QE led to abnormally positive conditions » Quantitative Easing evolved along 3 stages - QE1, QE2, and QE3 - over the last 5 years » Under the latest, the Fed’s open-ended bond purchases reached $85 billion per month » QE led to: ((1)) high g g global liquidity; q y; ((2)) historicallyy low interest rates;; and ((3)) substantial inflows to LatAm

Global Interest Rate Benchmark - US 10-yr T-Bill (%)

Source: Bloomberg

Net Capital Inflows to LatAm 5* – 2005 to 2012

Source: Central Banks and IMF *LatAm LatAm 5: Brazil, Brazil Mexico, Mexico Peru, Peru Chile and Colombia

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Tighter funding conditions in a Post QE environment Âť Fed started tapering in January and is expected to continue to cut stimulus during the year

Âť New environment entails a re-pricing of credit risk and lower appetite for risk exposure:

- More selective investors

- Lower capital flows should be directed to emerging markets - Higher funding costs

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Brazil’s macro environment poses additional concerns Real GDP Growth (annual rate, %)

» 2014 will be the fourth consecutive year of below-trend growth » Inflation has limited pass through ability » Higher consumer leverage

» Negative investors sentiment

Inflation ( IPCA, annual rate, %)

» Presidential election adds uncertainty » Infrastructure projects are highly dependent on

external funding

Source: Banco Central do Brazil; IBGE; Moody’s Abril 2014

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2

Credit quality still holds

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Sovereign Considerations » Brazil´s Baa2/ stable rating already incorporates 2014 expectations of:

Gen. Gov. Debt/GDP, 2004-2013

» GDP growth at around 2% » Debt to GDP above 60% » Limited fiscal flexibility

» Focus on 2015: » Negative pressure on the rating in case of: » Continued low GDP growth associated with annual

Source: Moody’s

rates less than 3% beyond 2014; and/or » Government debt ratios that exceed 60% of GDP

maintain an upward trend

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Sovereign Considerations » Low visibility on government actions for 2015 » No clear direction before presidential elections » Reversal of investors negative sentiment? » Fiscal adjustments will be addressed?

» “Reference levels” are key considerations » What are the reference levels for g growth and inflation?

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Sovereign Considerations External Vulnerability Indicator, 2013

Source: Moody’s; several domestic sources

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Credit Quality still holds » 153 rated non-financial corporates in 17 countries Rated non-financial corporates p

» Rated companies have low refinancing risk: 1)) Adequate q debt p profile and liquidity q y 2) FX exposure mitigated by USD revenues, hedging instruments and covenants measured in USD 3) Higher exposure is at capital spending needs

Source: Moody’s *LatAm 5: Brazil, Mexico, Peru, Chile and Colombia

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1) Adequate Debt Profile and Liquidity Âť Companies took advantage of favorable capital markets to refinance debt earlier than usual

Debt Amortization Schedule – rated non-financial corporates (in BRL billion)

Source: Companies audited financials

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1) Adequate Debt Profile and Liquidity » Liquidity risk remains stable

Liquidity – rated non-financial corporates

Source: Companies audited financials and Moody’s estimates Note: Funding risk defined as "LOW" if liquidity available in the next 12/24 months cover more than 150% of debt maturing in the next 12/24 months; as "MEDIUM" if it covers below 150% but above 100%; and "HIGH" if it covers less than 100%.

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1) Adequate Debt Profile and Liquidity Âť Cash decreased 5.4% while ST debt increased 7.8%, leading to still comfortable coverage of 2.2x

Cash coverage – rated non-financial corporates (figures in BRL billion)

Source: Companies audited financials

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2) FX: exposure has mitigants Âť FX exposure is mitigated by revenues in USD, hedging and covenants measured in USD Foreign currency debt as a % of total debt

Sectors most exposed to FX depreciation

Source: Companies audited financials

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3) Growth capex can be affected » Non-financial corporates have some dependence on capital markets funding » Lower availability of funding can delay or even interrupt expansion plans » In Brazil, BNDES accounts for about 15% of total debt for rated non-financial corporates

Debt Structure In Brazil

Source: Company filings (*) Note: Bank debt in Brazil includes: BNDES, export facilities, CCB/CCI, SHF/Financing to homebuilders and others.

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BRAZIL – Sector Overview » More negative actions are expected, although credit quality should remain relatively stable – 8 positive and 8 negative rating actions in 2013

Ratings Drift 2013 - Actions by Country

Rating Outlooks in Brazil

Source: Moody’s

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BRAZIL – Sector Overview » Trends are mixed, depending on the sector » Main performance drivers: – Brazil will grow less than LatAm peers average – Negative investors sentiment and more selective capital markets – High Hi h iinflation fl ti lilimits it pass th through h ability bilit – Weaker BRL helps exports, but pressures USD debt – Commodity prices should remain at lower levels

» Outlook is positive for protein and heavy construction sectors, while homebuilders and steel companies should face more challenges

Source: Moody’s

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Main contacts – LATAM Corporate Finance São Paulo

+55 (11) 3043 3043-7300 7300

Marianna Waltz

Associate Managing Director - AMD

+55 (11) 3043-7309

marianna.waltz@moodys.com

Soummo Mukherjee

VP-Sr Credit Officer

+55 (11) 3043-7341

soummo.mukherjee@moodys.com

Barbara Mattos

VP-Senior Analyst

+55 (11) 3043-7357

barbara.mattos@moodys.com

Cristiane Spercel

AVP, Analyst

+55 (11) 3043-7333

cristiane.spercel@moodys.com

Erick Rodrigues

AVP, Analyst

+55 (11) 3043-7345

erick.rodrigues@moodys.com

Carolina Chimenti

Associate Analyst

+55 (11) 3043-7318

carolina.chimenti@moodys.com

Fernando Simis

Associate Analyst

+55 (11) 3043-7332

fernando.simis@moodys.com

Vitor Martins

Associate Analyst

+55 (11) 3043-7348

vitor.martins@moodys.com

J ã M João Machado h d P Paschoal h l

A Associate i t Analyst A l t

+55 (11) 3043 3043-6080 6080

j joao.paschoal@moodys.com h l@ d

Mexico City

+52 (55) 1253-5700

Nymia Almeida

VP-Sr Credit Officer

+52 (55) 1253-5707

nymia.almeida@moodys.com

Alonso Sanchez

AVP, Analyst

+52 (55) 1253-5706

alonso.sanchezrosario@moodys.com

Gabriel Vigueras

VP Senior Analyst VP-Senior

+52 (55) 1253 1253-5700 5700

gabriel vigueras@moodys com gabriel.vigueras@moodys.com

Sandra Beltran

Analyst

+52 (55) 1253-5718

sandra.beltran@moodys.com

Kijana Mack

Associate Analyst

+52 (55) 1253-5700

kijana.mack@moodys.com

Rosa Morales

Associate Analyst

+52 (55) 1253-5746

rosa.morales@moodys.com

Whitney Leavens

Associate Analyst

+52 (55) 1253-5748

whitney.leavens@moodys.com

Diana Gonzalez

Associate Analyst

+52 (55) 1253-5700

diana.gonzalez@moodys.com

Buenos Aires

+54 (11) 5129-2600

Veronica Amendola

VP, Senior Analyst

+54 (11) 5129-2610

veronica.amendola@moodys.com

Martina Gallardo

y Analyst

+54 ((11)) 5129-2600

martina.gallardo@moodys.com g @ y

Alejandro Kalogiannidis

Associate Analyst

+54 (11) 5129-2600

alejandro. kalogiannidis @moodys.com

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