S&P Assigns 'BB-' FC, 'BB+' LC To Banco do Nordeste.

NEW YORK--(BUSINESS WIRE)--Standard & Poor's CreditWire 7/10/98-- Standard & Poor's today assigned its double-'B'-minus long-term foreign currency counterparty credit rating to Banco do Nordeste do Brasil S.A. (BNB). At the same time, Standard & Poor's assigned its double-'B'-plus long-term local currency counterparty rating to the bank. The outlook is stable. The double-'B'-minus foreign currency rating is also assigned to the US$340 million of debt outstanding. Additionally, Standard & Poor's assigned its single-'B' short-term foreign currency and its single 'B' short-term local currency credit ratings to the bank.

The ratings are constrained by:

-- Weak asset quality and capitalization that undermine the bank's

solvency absent sovereign support.

-- The absence of a timely government guarantee on BNB obligations,

given that Brazilian law prohibits bankruptcy proceedings against BNB provided that the federal government remains the controlling shareholder. Although the law allows BNB's creditors to seek payment from the government after obtaining a final judgment against BNB, the litigation process could significantly delay payments to creditors.

-- BNB's lesser importance to the government's public policy compared

with larger Brazilian public financial institutions. In the long-run, potential shifts in economic policy could reduce BNB's public policy role and, in turn, its sovereign support.

The ratings are supported by:

-- The Brazilian government's demonstrated commitment to support

BNB. The government holds 83% of the voting shares of the bank and closely controls management of the bank's operations. Strong sovereign support is also evidenced by the government's funding and capitalization policies with respect to BNB, including the recent US$170 million capital increase (with an additional US$90 million already authorized and expected to be released by year-end) and rising deposits by government agencies. The government also extends guarantees for BNB's largest loans and issues special regulations for loan loss provisioning.

-- The bank's key public policy role in the Northeast region of

Brazil -- home to over 30% of Brazilians and given the region's weak social indicators, with GDP per capita of only half of Brazil's average. BNB is the sole provider of long-term financing to the industrial and agriculture sectors in many Northeast states and in some states it is responsible for 70%-95% of the total lending by the financial system.

-- The bank's steady liquidity inflow, supported by constitutionally

mandated monthly transfers of 1.8% of the total collected federal income tax (IR), industrial product taxes (IPI), and transfers and deposits by other public institutions.

-- A favorable liability structure, with 79% of BNB's funding

being long-term. The mismatches of assets and liabilities regarding both maturity and currency risk are minimal. Exchange rate risk is mitigated by indexing the matching assets in local currency to the exchange rate. However, indirect exchange rate exposure is present, since only a part of these assets are either hedged or placed with exporters.

BNB's local currency rating -- on par with the sovereign -- reflects the bank's heavy funding dependence on the sovereign, which is constitutionally mandated. Earmarked transfers of federal tax receipts, which account for 53% of the bank's funding base, support the bank's liquidity position and creditworthiness equal to that of the sovereign.

OUTLOOK: STABLE Continued government support, given BNB's key public policy function in the Northeast region, is expected to offset periodic pressures on BNB's asset quality and permit, at present, the bank's creditworthiness to mirror that of the Republic of Brazil, said Standard & Poor's.---CreditWire.

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              Jose R. Tora, New York (1) 212/208-8222
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