Fitch Assigns 'BBB' Rating to Rio Finance Oil Trust's USD2B Series 2014-1 Notes; Outlook Stable

SAO PAULO--()--Fitch rates Rio Finance Oil Trust's series 2014-1 notes and series 2014-2 special indebtedness interests as follows:

--USD2 billion series 2014-1 notes 'BBB', Outlook Stable;

--BRL2.4 billion series 2014-2 special indebtedness interests 'AAAsf (bra)', Outlook Stable.

The assigned ratings address timely payment of interest and principal on a quarterly basis.

The issuances are backed by the royalty flows owed by oil concessionaires, which are 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 Rio Previdencia (RP), the state's pension fund.

KEY RATING DRIVERS

The assigned ratings reflect (i) the increase in royalties supported by the expected increase in oil production in Brazil, backed by Petrobras' capital investment program of USD220 billion between 2014 and 2018; (ii) that the generation of cash flows to meet debt service is not dependent on either RJS or RP; (iii) the implied cap imposed by Petrobras' rating as the main obligor of the royalties; (iv) a certain degree of oil price risk; (v) the irrevocable instructions requiring Banco do Brasil S.A. (BB) to sweep the royalty payments to the transaction account.

The above mentioned characteristics allow the transaction to be rated above the 'BBB-' rating of RJS and reach the same rating as Petrobras' foreign currency Issuer Default Rating (FC IDR) and Brazil's sovereign rating of 'BBB'. The transaction remains exposed to transfer and convertibility risk as all payments are made onshore and then transferred offshore to the transaction account.

RATING SENSITIVITIES

The ratings are sensitive to changes in the credit quality of Petrobras as the main obligor of the flows backing this transaction and to the sovereign rating and country ceiling of Brazil. These ratings act as caps to this transaction.

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

The transaction is exposed to price and volume risk related to oil production. While debt service coverage ratios (DSCRs) are sufficiently robust to absorb significant declines, a large long-run decline may impact transaction credit quality.

TRANSACTION SUMMARY

The transaction is backed by the royalty flows owed by oil concessionaires, which are predominantly operated by Petrobras, to the government of RJS, who assigned 100% of the flows to RP. For the purpose of this transaction RP sold its rights to Rio Finance Oil Trust. The SPV will initially issue USD2 billion in series 2014-1 notes and BRL2.4 billion of series 2014-2 special indebtedness interests, out of a total program of USD5 billion. Both series are pari passu.

The program structure considers that the trust may issue additional series of notes on a subordinated or pari passu basis to outstanding series under the program. Nevertheless, issuance of additional series will be subject to certain conditions, including rating affirmation, delivery of a supplemental indenture, and compliance with both a forward-looking and a backward-looking DSCR test.

For more details on the Key Rating Drivers and Rating Sensitivities please refer to the presale report, available on Fitch's website at 'www.fitchratings.com'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--Global Structured Finance Rating Criteria - May 2014;

--Future Flow Securitization Rating Criteria - June 2013;

--Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds - January 2014;

--Criteria for Rating Caps and Limitations in Global Structured Finance Transactions - June 2013;

--Counterparty Criteria for Structured Finance and Covered Bonds - May 13, 2013.

Applicable Criteria and Related Research:

Global Structured Finance Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748821

Future Flow Securitization Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749768

Criteria for Interest Rate Stresses in Structured Finance Transactions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695535

Criteria for Rating Caps and Limitations in Global Structured Finance Transactions

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

Counterparty Criteria for Structured Finance and Covered Bonds

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=835727

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.

Contacts

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
+571-326-9999
or
Committee Chairperson
Greg Kabance
Managing Director
+1-312-368-2052
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

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
+571-326-9999
or
Committee Chairperson
Greg Kabance
Managing Director
+1-312-368-2052
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com