OREANDA-NEWS. Fitch Rates Petrobras' Proposed Reopening 'BB(EXP)' Chicago Fitch Ratings has assigned a 'BB(EXP)' rating to Petroleo Brasileiro S. A.'s (Petrobras) proposed USD notes reopening. The notes reopened are part of Petrobras Global Finance B. V. (PGF) 2021 and 2026 notes and will be unconditionally and irrevocably guaranteed by Petrobras. Proceeds will be used to refinance existing debt and for general corporate purposes.

Linkage to the Sovereign

Petrobras' 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. 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 46%.

Government Support

Petrobras' credit linkage to the sovereign is evidenced by supporting domestic fuel prices above international levels as well as by the lending commitments offered by Banco do Brasil and Caixa Economica Federal during first-half 2015 to bolster Petrobras' liquidity. Absent implicit and explicit government support, Petrobras' credit metrics are not consistent with the assigned rating. As of March 31, 2016 the company reported total financial debt of USD126.4 billion and Fitch defined gross leverage was 6.1x.

Cash Flow Remains Under Pressure

Petrobras' cash flow generation is expected to remain under pressure, despite the recent price increase and the company's efforts to reduce capex. Petrobras is expected to generate enough cash flow from operations (CFFO) to cover capex and will rely on its access to the debt capital markets to refinance its upcoming maturities. Any future debt reduction will depend highly on divestitures, which are uncertain and difficult to predict. The company expects its divestment plan for 2015 and 2016 to amount to USD15.1 billion, of which USD727 million where completed in 2015 and year to date approximately USD1.38 billion worth of divestments have been approved or closed negotiations and/or are pending board approval.

Credit Metrics to Remain Weak

Fitch expects Petrobras' leverage, as measured by total debt/EBITDA, to remain above 5.0x over the medium term and for leverage to decline only if the company's divestiture program is successful. As of March 31, 2016 the company reported total financial debt of approximately USD126.4 billion. As of year-end 2015 total proved reserves (1P) were approximately 10.5 billion barrels of oil equivalent (boe) and proved developed (PD) reserves were 5.2 billion boe, under SEC criteria. This translates into debt/1P of USD12/boe and debt/PD reserves of USD24.5/boe.

Decreased Growth Potential

Petrobras' production growth potential has decreased as a result of the corruption scandal surrounding the company and forced reductions in capex from stagnant cash flow generation and low oil prices. Fitch's rating case assumes Petrobras' gross production to increase to approximately 3.1 million barrels of oil equivalent per day (boed) over the next two to three years and then to remain relatively flat over the ensuing two years.

RATING SENSITIVITIES

A negative rating action on Petrobras could result from a downgrade of the sovereign and/or the perception of a lower linkage between Petrobras and the government.

A positive rating action on Brazil, could lead to a positive rating action on Petrobras.

The sovereign rating sensitivities include:

--Failure to arrest the pace of increase in the government debt burden and crystallization of material contingent liabilities;

--A deeper and more prolonged recession that further undermines government debt dynamics and stokes political and social instability;

--Erosion of international reserves and deterioration in government debt composition.

The sovereign's Rating Outlook is Negative. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a positive rating change. Future developments that could individually, or collectively, result in a stabilization of the Outlook include:

--An improvement in the political environment that is conducive to improved policy implementation and supports confidence, growth and reform prospects;

--Fiscal consolidation that leads to greater confidence in the capacity of the government to achieve debt stabilization;

--Improved investment and growth environment and a reduction in macroeconomic imbalances.

LIQUIDITY

Petrobras' liquidity position is currently supported by robust cash and marketable securities, stable cash flow generation and most recently by increasing lines of credit. As of March 31, 2016, Petrobras reported USD22.6 billion of cash and marketable securities. This liquidity is considered adequate when compared with short-term debt of USD17.4 billion. The company's liquidity is also supported by its funds from operations (FFO) of approximately USD20 billion, which is expected to be used to cover capex of approximately USD18 billion to USD20 billion per year.

As of the LTM ended March 31, 2016, FFO totaled approximately USD20 billion. Petrobras' FFO has benefitted from the declining global hydrocarbon prices, unlike other oil and gas producers that have suffered from the steep decrease in prices. This benefit is not expected to be sustainable in the long term. Petrobras' liquidity will also benefit from an expected line of credit of USD10 billion with China Development Bank, for which the two entities executed a term sheet on Feb. 26, 2016, but the final terms are still pending.

FULL LIST OF RATING ACTIONS

Fitch currently rates Petrobras as follows:

Petroleo Brasileiro S. A. (Petrobras)

--Long-Term Foreign-Currency IDR 'BB'; Outlook Negative;

--Long-Term Local-Currency IDR 'BB'; Outlook Negative.

Petrobras International Finance Company (PIFCO)

--International debt issuances 'BB'.

Petrobras Global Finance B. V. (PGF)

--International debt issuances 'BB'.

Petrobras Argentina S. A.

--International debt issuances 'BB'.