Fitch Ratings has downgraded the following ratings on Rio Oil Finance
--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
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
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
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.
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14
Criteria for Rating Caps and Limitations in Global Structured Finance
Transactions (pub. 28 May 2014)
Future Flow Securitization Rating Criteria (pub. 12 Aug 2015)
Global Structured Finance Rating Criteria (pub. 06 Jul 2015)
Dodd-Frank Rating Information Disclosure Form
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.
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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
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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
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