Fitch Affirms Petrobras' IDRs at 'BBB-'/'AAA(bra)'; Revises Outlook to Negative

Fitch Ratings has affirmed the foreign and local currency Issuer Default Ratings (IDRs) and outstanding debt ratings of Petroleo Brasileiro S.A. (Petrobras) at 'BBB-' and National Scale rating at 'AAA(bra)'. Concurrently, Fitch has removed Petrobras from Rating Watch Negative. The Rating Outlook is Negative.

These rating actions affect approximately USD50 billion of issued debt, including debt issued by PIFCO, PGF, and Petrobras Argentina which Petrobras unconditionally and irrevocably guarantees. For a complete list of ratings, please see the end of the press release.

KEY RATING DRIVERS

The rating action reflects the publication of year-end 2014 audited financial statements, which averted violating indebtedness covenants that would have allowed creditors to start an acceleration process. Fitch had placed Petrobras' ratings on Rating Negative Watch as a result of the uncertainty surrounding the company's ability to make the necessary adjustments to comply with covenants that require it to report audited year-end financials within 120 days of the period's end, plus a 60-day grace period. This risk has now been mitigated by the released of audited financial statements.

The rating action also reflects the company's improved liquidity position as a result of the recently announced USD13 billion of new financings facilities. As previously expected by Fitch, a portion of the recently announced financing facilities are being provided by government related entities, Banco do Brasil and Caixa Economica Federal. This access to financing, coupled with reduced capex plans and asset divestitures, also mitigates short-term liquidity concerns.

The Negative Outlook reflects the uncertainties surrounding the company's ability to deleverage its balance sheet in the medium term. Petrobras may face challenges to deleverage its capital structure organically, as the corruption scandal may result in delivery delays of production units. Fitch will continue to monitor Petrobras' strategy to strengthen its capital structure and expects the company to release coherent deleveraging program once the company releases its revised business plan for the next five years. Fitch expects Petrobras to improve access to the debt capital markets within the next 12 to 24 months in order to support its investment plans and funding needs.

Petrobras' 'BBB-' and 'AAA (bra)' ratings continue to reflect its close linkage with the sovereign rating of Brazil due to the government's control of the company and its strategic importance to Brazil as its near monopoly supplier of liquid fuels. Absent implicit and explicit government support, Petrobras' credit quality is not commensurate with an investment grade rating. The linkage is evidenced by the recent lending commitments offered by Banco do Brasil and Caixa Economica Federal as well as the decision to maintain gasoline and diesel prices at the pump significantly above international levels in order to bolster Petrobras' cash flow generation. By law, the federal government must hold at least a majority of Petrobras' voting stock. The government currently owns 60.5% of Petrobras' voting rights, directly and indirectly, and has an overall economic stake in the company of 48.9%. Petrobras' cash position is sufficient to meet its short-term funding needs.

KEY ASSUMPTIONS

--Petrobras' ratings assume strong government support through access to financing

--Fitch assumes Petrobras' production will continue to grow over the medium term

--The company maintains a similar downstream pricing strategy as it has done in the past and domestic prices converge with international prices in the medium- to long-term.

RATING SENSITIVITIES

A negative rating action may be considered if Petrobras fails to lower its total debt-to-EBITDA below 5.0x over the medium term and there is a lessening in the perception of government support. While a sovereign rating downgrade could also cause a negative rating action, Fitch will consider the company's credit quality and materiality of government support in such case.

A positive rating action is unlikely in the short- to medium-term; nevertheless, direct explicit support from the government could help stabilize the ratings and, to the extent support is material, the ratings could be equalized again in the future.

Fitch has affirmed the following ratings:

Petroleo Brasileiro S.A. (Petrobras)

--Foreign currency IDR at 'BBB-'; Outlook Negative

--Local currency IDR at 'BBB-'; Outlook Negative

--National long-term rating at 'AAA (bra)'. Outlook Negative

--Long-term National Debentures at 'AAA (bra)'

Petrobras International Finance Company (PIFCO)

--Foreign currency IDR at 'BBB-'; Outlook Negative

--International debt issuance at 'BBB-'

Petrobras Global Finance B.V. (PGF)

--Foreign currency IDR at 'BBB-'; Outlook Negative

--International debt issuance at 'BBB-'

Petrobras Argentina S.A.

--International debt issuance at 'BBB-'

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (August 2013);

--'Rating Oil and Gas Production Companies' (August 2012).

Applicable Criteria and Related Research:

Rating Oil and Gas Production Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682334

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=983566

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