OREANDA-NEWS. Fitch Ratings has downgraded the senior secured notes issued by SBM Baleia Azul, S.a.r.l. (SBM Baleia) as follows:

--Series 2012-1 senior secured notes due 2027 to 'BB' from 'BB+'.

The Rating Outlook is Negative.

The notes are backed by the flows related to the charter agreement signed with Petroleo Brasileiro S.A. (Petrobras) for the use of the floating production storage and offloading unit (FPSO) Cidade de Anchieta for a term of 18 years. SBM do Brasil Ltda. (SBM Brasil), the Brazilian subsidiary of SBM Holding Inc. S.A. (SBM), is the operator of the FPSO. SBM is the sponsor of the transaction. The FPSO Cidade de Anchieta began operating at the Baleia Azul oil field in September 2012.

The rating action follows Fitch's downgrade of Petrobras, the offtaker of the transaction. The Negative Outlook on the SBM Baleia notes reflects Petrobras' Issuer Default Ratings (IDRs) which also have a Negative Outlook.

The rating is ultimately supported by the credit quality of SBM Offshore N.V. as the ultimate parent to SBM Holding Inc. S.A., main sponsor of the transaction, the strong operating performance of the asset, and the importance of the field to Petrobras.

KEY RATING DRIVERS
Downgrade of Petrobras:
On May 10, 2016, Fitch downgraded the IDRs for Petrobras to 'BB' from 'BB+' and maintained the Negative Outlook. Fitch uses the offtaker's IDR as the starting point to determine the appropriate strength of the offtaker's payment obligation. Fitch's view of the offtaker's payment obligation will act as the ultimate rating cap to the transaction.

The downgrade is in response to Brazil's downgrade, which reflects the deeper-than-anticipated economic contraction, failure of the government to stabilize the outlook for public finances, and the sustained legislative gridlock and elevated political uncertainty that are sapping domestic confidence and undermining governability, as well as policy effectiveness.

Strength of the contract:
In this case the offtaker's payment obligation is equalized with the offtaker's IDR based on Fitch's view of the strength of such payment obligation. Fitch believes the risk of early termination of the contract, or its renegotiation, even during adverse market conditions, is mitigated by the fact that production units represent marginal cost to the offtaker and are continuously extracting oil at sustained levels.

Credit Quality of the Operator:
SBM Offshore N.V. is the ultimate parent to SBM Holding Inc. S.A., main sponsor of the transaction. The transaction benefits from SBM Offshore N.V.'s solid revenue growth, global leadership in leasing FPSOs and overall strong operational performance of its fleet.

Performance of the Assets:
Asset performance is in line with expectations, tied to characteristics of the contract including fixed rates, which provide for cash flow stability. Average uptime levels in 2015 was 95%/Up-to-date, average economic uptime levels, considering gas production and water injection with bonus days, have averaged 106%, comparing favorably to Fitch's base case assumption, including bonus, of 98.5%.

Available Liquidity:
The transaction benefits from a $26 million (LOCs provided by ABN Amro, 'A+'/Stable) debt service reserve account (DSRA) equivalent to the following two quarterly payments of principal and interest. As of end-2015, net debt balance closed at approximately $401.7 million.

RATING SENSITIVITIES
The rating may be sensitive to changes in the credit quality of Petrobras as charter offtaker and any deterioration in the credit quality of SBM as operator and sponsor. In addition, the transaction's rating is sensitive to the operating performance of the FPSO Cidade de Anchieta.

Contacts:
Andres de la Cuesta
Primary Analyst
Associate Director
+1 312-606-2330
Fitch Ratings, Inc.
70 W. Madison
Chicago, IL 60602

Committee Chairperson
Greg Kabance
Managing Director
+1-312-368-2052

Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com.

Additional information is available at www.fitchratings.com.

Sources of Information:
In addition to the sources of information identified in the master criteria, this action was additionally informed by information from SBM Offshore.

Applicable Criteria
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)
Criteria for Rating Oil Vessel-Backed Financings in Latin America (pub. 30 Dec 2015)
Global Structured Finance Rating Criteria (pub. 06 Jul 2015)

Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
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