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 January 22, 2016 - 12:44 PM EST
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Fitch Downgrades Rio Oil Finance Trust's 2014-1 & 2014-3 Notes; Outlook Negative

Fitch Ratings has downgraded the following ratings on Rio Oil Finance Trust's issuances:

--USD2 billion series 2014-1 notes to 'BB-' from 'BB+';

--BRL 2.4 billion series 2014-2 special indebtedness interests to 'Asf(bra)' from 'AAsf(bra)';

--USD1.1 billion series 2014-3 notes to 'BB-' from 'BB+'.

Fitch has assigned a Negative Outlook to all of the issuances, which were on Rating Watch Negative prior to today's downgrades.

The downgrades reflect the continued downturn in oil prices and its impact on debt service coverage levels; this pressure on transaction performance is heightened by the potential impact the waiver conditions approved by bondholders might have on the transaction's coverage levels in case some of the milestones are not met within the waiver period. The Negative Outlook reflects the additional impact lower oil prices may have on future production levels that would in turn further impact debt service coverage levels.

The ratings on all series are ultimately supported by the structural features in place including the debt service coverage ratio (DSCR) triggers and six-month reserve account. Fitch believes these structural features ultimately support the transaction ratings at the revised levels under the current depressed oil price assumption. The ratings address timely payment of interest and principal on a quarterly basis.

The issuances are backed by the royalty flows owed by oil concessionaires, predominantly operated by Petroleo Brasileiro S.A. (Petrobras), to the government of the state of Rio de Janeiro (RJS), who assigned 100% of the flows to RioPrevidencia (RP), the state's pension fund.

KEY RATING DRIVERS

Transaction Performance Impacted by Depressed Oil Prices: To reflect continued expected market weakness in the near term, Fitch has revised its base case price deck downward for Brent crude oil to $45 in 2016 and $55 in 2017. This new price expectation results in lower-than-expected coverage ratios, minimizing the transaction's ability to absorb further stress levels. The actual DSCR reported for the fourth quarter of 2015 (4Q15) was 2.7x and the annualized DSCR was 3.2x. These numbers are expected to further decrease as senior tranches start amortizing in 2016 and government debt obligations remain substantial until 2018.

Future Expected Production Increases at Risk: While short-term production expectations have not changed; Wood Mackenzie updated production expectations which reflect Petrobras' announced investment plan released on June 29, 2015, incorporate on average a 6% decrease in production levels for each year of the original projections. However, continued depressed oil prices have translated into additional capital expenditure cuts by Petrobras. On Jan. 12, 2016, a new cut of USD32 billion in Petrobras' investment plan was announced, which could result in further reductions in production levels after 2017. Given that the transaction relies on growth in royalty flows, production levels significantly below expectations may negatively affect the rating of the existing series.

Potential Increase in Political Risk: Retention of part of the excess cash flows in combination with the State's weaker credit profile and heavier debt service decrease the sponsor's incentive to support the transaction and increase the exposure of the transaction to political risk.

RATING SENSITIVITIES

The ratings are capped by the credit quality of Petrobras, as the main obligor of the flows backing this transaction, and Brazil's sovereign and country ceiling ratings.

Additionally, the ratings are sensitive to the rating of Banco do Brasil as a direct counterparty to the transaction.

The transaction is exposed to price and volume risk related to oil production. Further declines in prices or production levels significantly below expectations may trigger downgrades.

Although the transaction rating is not directly linked to the originator's rating, in case of considerable downgrade of the state's rating, the rating of the transaction may be impacted negatively.

Additionally, failure to meet the milestones contemplated in the waiver might lead to a negative rating action on the transaction ratings.

DUE DILIGENCE USAGE

No third party due diligence was provided or reviewed in relation to this rating action.

Additional information is available at www.fitchratings.com.

Sources of Information:

In addition to the sources of information identified in Fitch's master criteria, this action was additionally informed by information from RP and the bond administrator, Banco do Brasil.

Applicable Criteria

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158

Criteria for Rating Caps and Limitations in Global Structured Finance Transactions (pub. 28 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748781

Future Flow Securitization Rating Criteria (pub. 12 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=868191

Global Structured Finance Rating Criteria (pub. 06 Jul 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867952

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=998253

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=998253

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Primary Analyst
Mirian Abe
Director
+55-11-4504-2614
Fitch Ratings do Brasil Ltda.
Alameda Santos 700, 7o Andar
Sao Paulo - SP, 01418-100
or
Secondary Analyst
Maria Paula Moreno
Senior Director
+57-1-484-6770 x 1210
or
Committee Chairperson
Greg Kabance
Managing Director
+1-312-368-2052
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com


Source: Business Wire (January 22, 2016 - 12:44 PM EST)

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