OREANDA-NEWS. Fitch Ratings has affirmed the series 2014 notes issued by Rio Oil Finance Trust as follows:

--USD2 billion series 2014-1 notes at 'BB-';

--BRL 2.4 billion series 2014-2 special indebtedness at 'Asf(bra)';

--USD1.1 billion series 2014-3 notes at 'BB-'.

The Rating Outlook remains Negative. Fitch's ratings on the notes address timely payment of interest and principal on a quarterly basis.

The issuances are backed by 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). The State of Rio de Janeiro assigned 100% of these flows to RioPrevidencia (RP), the state's pension fund, and RP sold these rights to Rio Oil Finance Trust, the issuer.

The rating actions reflect the transaction's resilience through the current stress period which, coupled with the upward trend in oil prices over the past several months, have helped mitigate the deteriorating credit quality of Petrobras, RJS and the Brazilian sovereign. The Negative Outlook reflects the additional impact lower oil prices could have on future production levels and the potential political risk which could negatively impact the transaction's performance.

On June 20, 2016, the series controlling parties consented to a second waiver and amendment agreement to: waive the declaration of a technical event of default related to the transaction's failure to meet certain required minimum forward-looking debt service coverage ratios (DSCRs); effectuate the commencement of an early amortization period during which 60% of excess cash flows will prepay debt on a monthly basis; release approximately $45 million from the trigger reserve account to prepay debt; modify the annualized average DSCR threshold that could trigger a technical event of default; and enhance the legal structure to allow for swifter enforcement of collateral if necessary.

The transaction failed to meet performance-related conditions stipulated by an initial waiver and amendment executed on Oct. 20, 2015. The initial waiver period concluded on March 22, 2016, at which time a technical event of default triggering an early amortization period could have ensued but transaction parties opted to execute the second waiver and agreement.

KEY RATING DRIVERS

Executed Waiver and Agreement: Fitch views positively the most recent waiver and amendment agreement, which underscores the sponsor's willingness to engage with bondholders in support of the transaction. Nonetheless, the transaction remains exposed to political risk as RJS's fast-deteriorating liquidity position limits the state's ability to meet its obligations and could impact its incentive to support the transaction.

Oil Prices Impact Performance: The plunge in oil prices during 2015 and the first quarter of 2016 (1Q16) impacted oil royalty flows such that Annualized Average DSCR (AADSCR) as of 2Q16 fell to 1.8x. Although the recent rebound in oil prices over the past five months benefits royalty flows and is expected to translate into higher AADSCRs going forward, a sustained low oil price environment will limit royalty flows used to pay debt service. The transaction continues to benefit from a six-month P&I liquidity reserve account, which could be used to insulate the transaction from short-term declines in oil prices.

Future Expected Production Increases at Risk: The transaction benefits from growth in royalty flows to meet future debt service payments. Depressed oil prices have led Petrobras to reduce production targets on multiple occasions. Sustained lower oil prices could translate into additional capital expenditure cuts by Petrobras, which could impact potential growth expectations in the medium term.

RATING SENSITIVITIES

The ratings are capped by the credit quality of Petrobras, the main obligor generating cash flows to support the transaction, and by the sovereign rating and country ceiling assigned to Brazil.

The transaction is exposed to oil price and production volume risks. Declines in prices or production levels significantly below expectations may trigger downgrades.

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.