OREANDA-NEWS. Fitch Ratings has taken the following rating actions to Schahin II Finance Company (SPV) Limited and Lancer Finance Company Ltd.:

Schahin II Finance Company (SPV) Limited (Schahin II)

--Series 2012-1 senior secured notes due 2023 downgraded to 'BB+' from 'BBB-'; Placed on Rating Watch Negative.

Lancer Finance Company Ltd. (Lancer Finance)

--Series 2010-1 senior secured notes due 2016; 'BBB-' Placed on Rating Watch Negative.

The Schahin II notes are backed by flows related to a long-term charter and services agreement signed with Petroleo Brasileiro S.A. (Petrobras) for the use of the dynamically positioned ultra-deepwater (UDW) drillship called 'Sertao'. Schahin Petroleo e Gas S.A. (Schahin P&G), the oil and gas arm of Brazilian-based Schahin Group (Schahin), is the operator of the vessel and primary sponsor of the transaction. The Lancer Finance notes are backed by flows related to a long-term charter and services agreement signed with Petrobras for the use of the dynamically positioned drillship S.C. Lancer. Schahin's heavy construction company Schahin Engenharia S.A. is the operator of the drilling rig.

The downgrade to the Schahin II notes reflects: (i) exposure to the deteriorating credit quality of Schahin; and (ii) potential pressure on global day rates and asset values caused by oil price declines. The transaction rating is not currently constrained by the Issuer Default Rating (IDR) assigned to Petrobras. The Rating Watch Negative reflects the weakening credit quality of the sponsor.

The rating action on the Lancer Finance notes reflects: the transaction's direct exposure to Schahin Engenharia S.A. and Schahin's weakening credit quality, balanced by the transaction's relatively low net debt levels and overall structural enhancements. The Rating Watch Negative on the notes reflects the Rating Watch Negative assigned to Petrobras, the weakening credit quality of the sponsor, and the potential impact of the Lava Jato investigations on Schahin.

The ratings on both transactions are ultimately supported by: (i) the credit quality of Petrobras as offtaker; (ii) Fitch's view on the strength of the existing contracts; (iii) potential support of the sponsor; and (iv) structural enhancements.

KEY RATING DRIVERS

Credit Quality of Schahin: The deteriorating credit quality of the Schahin group exposes both transactions to the potential risk of early termination under the charter and services agreements. These transactions are directly and indirectly exposed as the charter and services agreements have termination clauses that include bankruptcy and performance issues. Furthermore, the deteriorating credit quality may affect the sponsor's ability to operate the vessel and impact overall maintenance, general safety, and uptime performance. Fitch recently downgraded the IDR assigned to Schahin Oil and Gas Ltd. (holding company) to 'B+' from 'BB-' and assigned a Negative Outlook due to higher leverage and tighter liquidity.

Credit Quality of Petrobras: On Feb. 3, 2015, Fitch downgraded the IDRs for Petrobras, offtaker to the transactions, to 'BBB-' from 'BBB' and placed the ratings on Rating Watch Negative. Petrobras' rating is the implied rating cap for the transactions, as the offtaker represents the main source of cash flow generation. The downgrade reflects the increased and prolonged uncertainty regarding Petrobras' ability to estimate and record an adjustment to its fixed assets on a timely manner, which could allow a significant portion of Petrobras' creditors to accelerate debt payments. The rating actions also reflect the potential impact the current corruption scandal may have on Petrobras' ability to hit Fitch's production expectations. The Rating Watch Negative reflects the heightened risk the company's debt could be accelerated if it is not able to provide year-end audited financial statements within 120 days of the period's end, plus a 60-day grace period.

Investigation of Schahin Engenharia: Last week, Brazil's Federal Police included Schahin Engenharia in the list of companies under formal investigation in the Lava Jato corruption scandal. Schahin Engenharia is a direct counterparty to Lancer Finance and therefore directly exposes this transaction to potential uncertainties related to this investigation. Additionally, this could further stress the financial condition of the overall group if they are temporarily suspended from entering into new contracts and future biddings with Petrobras. Fitch believes the impact this situation may have on the transactions is partially mitigated by transaction structural features.

Structural Enhancements Support Lancer Finance: The transaction benefits from extremely low leverage as the structured financing has continued to de-lever since closing in 2010. Furthermore, reserves provide six months of debt service and three months of operating expenses, which, assuming no payment delays under the charter and service agreements, would allow the transaction to de-lever (in net debt terms) during 2015. Fitch conservatively estimates loan-to-value (LTV) levels to be in the range of 20%-30%, depending on various assumptions.

Strength of Existing Contracts: Despite the ongoing Lava Jato investigations, Petrobras has indicated its intention to continue honoring the terms of its existing offshore charter and service contracts despite the company's recent decision to temporarily ban affiliates of oil and gas service companies from participating in new contracts and future bidding processes with Petrobras. In Fitch's view, the existing contracts are further supported by Brazilian offshore supply/demand fundamentals. The existing fleet of contracted offshore vessels is essential to the overall production growth strategy of Petrobras and Brazil. Local supply of drillships is constrained by the delayed delivery of 28 new drillships (Sete Brasil).

Exposure to Market Day Rates and Asset Prices: Fitch's base case analysis for the oil vessel-backed structured finance transactions assumes that the existing underlying contracts remain in place for the duration of the contracts. However, if the temporary ban is further extended or a contract terminates for any other reason, the related transactions could be exposed to then current market conditions. Currently contracted day rates remain in line with current market rates; however, a further long-term decline in oil price may decrease market day rates below contracted day rates. Fitch believes exposure to contract termination varies for each transaction given the different LTV levels.

RATING SENSITIVITIES

The ratings are sensitive to implications of the Lava Jato investigations on Schahin and the Brazilian oil and gas industry, changes in the credit quality of Petrobras as offtaker, the operating performance of the rigs, and further deterioration of Schahin's quality as sponsor to the transactions.