Fitch Expects to Rate Rio Finance Oil Trust's Series 2014-1 Notes 'BBB';
SAO PAULO -- June 2, 2014
Fitch Ratings expects to rate Rio Finance Oil Trust's series 2014-1 notes and
series 2014-2 special indebtedness interests as follows:
--US 1 billion series 2014-1 notes 'BBB(exp)', Outlook Stable;
--BRL 2.7 billion series 2014-2 special indebtedness interests
'AAA(exp)sf(bra)', Outlook Stable.
The expected ratings address timely payment of interest and principal on a
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 RioPrevidencia (RP), the state's pension fund.
KEY RATING DRIVERS
The expected rating reflects (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 abovementioned characteristics allow the transaction to be rated above the
'BBB-' rating of RJS' rating of 'BBB-' 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
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 DSCR's are sufficiently robust to absorb significant declines, a large
long-run decline may impact transaction credit quality.
The proposed 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 is
expected to initially issue US 1 billion in series 2014-1 notes and BRL2.7
billion of series 2014-2 special indebtedness interests, out of a total
program of USD5 billion. Both series will be 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
For more details on the Key Rating Drivers and Rating Sensitivities please
refer to the presale report, which will be available soon on Fitch's website.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Future Flow Securitization Rating Criteria' (June 2013);
--'Global Structured Finance Rating Criteria' (May 2014);
--'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,
Applicable Criteria and Related Research: Rio Finance Oil Trust
Future Flow Securitization Rating Criteria
Global Structured Finance Rating Criteria
Criteria for Interest Rate Stresses in Structured Finance Transactions
Criteria for Rating Caps and Limitations in Global Structured Finance
Transactions ￢ﾀﾓ Effective June 12, 2013 to May 28, 2014
Counterparty Criteria for Structured Finance and Covered Bonds
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Fitch Ratings do Brasil Ltda.
Alameda Santos 700, 7o Andar
Sao Paulo - SP, 01418-100
Maria Paula Moreno
Elizabeth Fogerty, New York, Tel +1-212-908-0526
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