Fitch Rates Rio Oil Finance Trust's USD1.1B Series 2014-3 Notes 'BBB'; Outlook Stable

Fitch Ratings has assigned the following rating to Rio Oil Finance Trust's series 2014-3 notes:

--USD1.1 billion series 2014-3 notes 'BBB', Outlook Stable.

In addition, Fitch has also taken rating actions on the series 2014-1 and 2014-2 special indebtedness interest notes as follows:

--USD2 billion series 2014-1 notes affirmed at 'BBB', Outlook Stable;

--BRL 2.4 billion series 2014-2 special indebtedness interests notes affirmed at 'AAAsf(bra)', Outlook Stable.

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

The assigned rating reflects (i) the growth in royalty flows supported by the expected increase in oil production in Brazil, backed by Petrobras' capital investment program of USD220 billion between 2014 and 2018; (ii) 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) the exposure of the collateral to oil price risk; (v) the irrevocable instructions requiring Banco do Brasil S.A. (BdB) to sweep the royalty payments to the transaction account which mitigates redirection risk.

The abovementioned 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.

RATING SENSITIVITIES

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 and country ceiling rating 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's rating, the rating of the transaction may be impacted negatively.

The transaction is exposed to price and volume risk related to oil production. While debt service coverage ratios (DSCR) are sufficiently robust to absorb significant declines, a large long-running decline may impact transaction credit quality.

Additionally, the ratings are sensitive to the rating of BdB as a direct counterparty to the transaction.

TRANSACTION SUMMARY

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 Oil Finance Trust. The SPV initially issued USD2 billion in series 2014-1 notes and BRL2.4 billion of series 2014-2 special indebtedness interests, and now issued additional USD1.1 billion in series 2014-3, out of the total program of USD5 billion. Approximately USD380 million of series 2014-3 were used to partially redeem series 2014-2 notes, which outstanding balance is now BRL1.44 billion. All series are pari passu.

According to the program structure, more series of notes might be issued, 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 new issue report which is available on Fitch's website.

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

Applicable Criteria and Related Research:

--Future Flow Securitization Rating Criteria - June 2014;

--Global Structured Finance Rating Criteria -August 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 - May 2014;

--Counterparty Criteria for Structured Finance and Covered Bonds - May 2014.

Applicable Criteria and Related Research:

Future Flow Securitization Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749768

Global Structured Finance Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=754389

Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725537

Criteria for Rating Caps and Limitations in Global Structured Finance Transactions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748781

Counterparty Criteria for Structured Finance and Covered Bonds
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158

Additional Disclosure

Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=931695

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