The State of Rio de Janeiro Public Servants Pension Fund issued dollar obligations backed by future Oil Royalties due to the state of Rio that now have broken certain covenants and investors are retaining part of the royalties paid. Another victim of the Petrobras scandal and low oil production and prices.
Fitch Ratings has downgraded Rio Oil Finance Trust’s issuances as follows:
–USD2 billion series 2014-1 notes to ‘BB+’ from ‘BBB-‘;
–BRL 2.4 billion series 2014-2 special indebtedness interests to ‘AAsf(bra)’ from ‘AAAsf(bra)’;
–USD1.1 billion series 2014-3 notes to ‘BB+’ from ‘BBB-‘.
Fitch has assigned a Negative Outlook to all of the issuances, which were on Rating Watch Negative prior to today’s downgrades.
The downgrades are a result of the continued downturn in oil prices and the impact on debt service coverage levels. The Negative Outlook reflects the 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 DSCR triggers and six-month reserve account. 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 fund.
KEY RATING DRIVERS
Transaction Performance Impacted by Depressed Oil Prices: Depressed oil prices have translated into lower than expected coverage ratios, minimizing the transaction’s ability to absorb further stress levels. The actual DSCR reported for 2015 Q3 was 3.8x and the annualized DSCR was 5.0x. Going forward, these numbers are expected to further decrease as senior tranches start amortizing in 2016 and government debt obligations remain substantial until 2018.
Breach of Forward Looking DSCR Trigger: The company’s quarterly surveillance report released on Sept. 24, 2015 presented a breach of the forward looking DSCR trigger at 1.2x, from a minimum required of 1.5x. Breach could lead to the commencement of an Early Amortization Period that calls for 60% of excess cash to be used to prepay notes on a monthly basis. While the DSCR trigger provides additional protections, the trigger does not fully reflect the cash flows generated from the transaction. This calculation assumes the Law 12734 has been fully implemented and it does not incorporate any increases in production over the initial estimations. The actual DSCR for 2016 would be closer to 2.0x’s.
Future Expected Production Increases at Risk: The impact of Petrobras’ revised production plan on the Rio de Janeiro fields is yet to be assessed. However, continued depressed oil prices may further impact production expectations as Petrobras’ investment plan released on June 29, 2015 was based on an oil price of USD60, translating into lower than expected DSCR levels. Nevertheless Fitch does not expect this to have a large impact on short-term production levels.
Potential Increase in Political Risk: Retention of part of the excess cash flows in combination of the state’s weaker credit profile decreases the incentive of the sponsor to support the transaction and increases the exposure of the transaction to political risk.
RATING SENSITIVITIES
The ratings are capped by the credit quality of Petrobras as the main obligor of the flows backing this transaction and to Brazil’s sovereign and country ceiling ratings.
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, the ratings are sensitive to the rating of Banco do Brasil as a direct counterparty to the transaction.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
Contacts:
Primary Analyst
Mirian Abe
Director
Fitch Ratings do Brasil Ltda.
Alameda Santos 700, 7o Andar
Sao Paulo – SP, 01418-100
Committee Chairperson
Greg Kabance
Managing Director
Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email:alyssa.castelli@fitchratings.com.
Additional information is available at http://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.
Applicable Criteria
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158
Criteria for Rating Caps and Limitations in Global Structured Finance Transactions (pub. 28 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748781
Future Flow Securitization Rating Criteria (pub. 12 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=868191
Global Structured Finance Rating Criteria (pub. 06 Jul 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867952
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=991609
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991609
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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