Fitch Assigns 'BBB' Rating to Rio Finance Oil Trust's USD2B Series 2014-1
Notes; Outlook Stable
SAO PAULO -- June 20, 2014
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)',
The assigned 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 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
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
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
For more details on the Key Rating Drivers and Rating Sensitivities please
refer to the presale report, available on Fitch's website at
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,
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
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, +1-212-908-0526
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