SAO PAULO--(BUSINESS WIRE)--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.
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.
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
Future Flow Securitization Rating Criteria
Criteria for Interest Rate Stresses in Structured Finance Transactions
Criteria for Rating Caps and Limitations in Global Structured Finance Transactions
Counterparty Criteria for Structured Finance and Covered Bonds