OREANDA-NEWS. August 04, 2015. Fitch Ratings downgrades and removes from Rating Watch Negative the senior secured notes issued by SBM Baleia Azul S.a.r.l. to 'BB+' from 'BBB-'. 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 reflects: (i) the weakening credit quality of SBM, (ii) Fitch's view related to Petrobras' willingness to honor underlying charter and service agreements; and (iii) the continued pressure on the industry caused by stressed oil prices and changes in worldwide supply and demand dynamics.

The Negative Outlook reflects the credit quality of SBM, the uncertainties related to Petrobras and any potential impact related to the ongoing investigations of SBM within Brazil. The ratings are ultimately supported by the underlying long-term contracts with Petrobras, the strong operating performance of the asset and importance of the field to Petrobras.

KEY RATING DRIVERS
--SBM's Group Weakening Credit Quality
SBM Offshore N.V. is the ultimate parent to SBM Holding Inc. S.A., main sponsor of the transaction. The charter and service agreements have termination clauses that include bankruptcy of the sponsor and performance-related weaknesses, such as extended down time. Furthermore, the transaction relies on the sponsor to pay operating expenses and due to the operating nature of the asset, sponsor support may be needed in cases of extended downtime or extraordinary capex needs. Additional sponsor's secured indebtness may reduce the cashflows distributed to the holding company reducing the available cashflows to support additional payments to the transaction.

Although the transaction benefits from a mortgage over the FPSO Cidade de Anchieta, Fitch highlights the oil field-specific nature of FPSOs and the high costs and long lead times required for refurbishment to relocation of an FPSO. In addition, the current market conditions have led to a slowdown on the number of new awards. These limit the alternative uses of the Cidade de Anchieta FPSO and the exposure of the asset to a depressed secondary market should the transaction require the sale of the asset to pay off the notes. As a result, the transaction's rating is linked to the credit quality of SBM.

During 2014, SBM reached an out-of-court settlement with the Dutch Public Prosecutor's Office (Openbaar Ministerie) over the investigation into potentially improper sales payments related to SBM contracts in Angola and Brazil. SBM is also currently under investigation by the Brazilian General Comptroller (CGU) regarding SBM contracts with Petrobras. The company continues to be restricted from entering into new contracts with Petrobras under a ban introduced in 2014.

--Petrobras' Willingness to Honor Existing Charter Agreements
Petrobras recently announced a 37% reduction in capex investments over the next five years. In light of this, Petrobras is reducing the number of production units expected to enter operation in Brazil by 2020 to 20 from 29; 16 of those 20 units are already contracted. While Fitch believes these reductions would not impact existing production contracts, , the Cidade de Anchieta contracts may be more vulnerable to the willingness of Petrobras to honor these contracts in the event of a long-term performance issue or bankruptcy of the sponsor.

--Strength of Contract
Cidade de Anchieta benefits from a long-term charter agreement with Petrobras expiring in 2030. While an ongoing investigation related to certain SBM contracts with Petrobras may have a negative impact on SBM's future business within Brazil, Fitch believes that Cidade de Anchieta remains a valuable asset for Petrobras and should not be affected by the investigations. The FPSO's daily production has averaged approximately 85,000 barrels, about 3% of Petrobras' production. Given the limited alternative use of the FPSO, the strength of the contract and the attractiveness of the oil field to Petrobras are important considerations.

--Cashflow Stability
The long-term contract supporting the transaction is not exposed to contract renewal risk. Rates are fixed and are not exposed to market day rates. During 2014, Cidade de Anchieta operated at an average oil uptime level exceeding 99%, Fitch's base case assumed an annual 'uptime' average of 98.5% (including bonus days). Average uptime levels for 2014 of 96.3%, these percentages consider gas production and water injection and do not include bonus days. During 2013 and 2014, the maximum of 38 bonus days per year were paid as a result of not using any maintenance days, if Fitch considers bonus payments; the average economical uptime for 2014 was 107.3%

--Available Liquidity
The transaction benefits from a debt service reserve account (DSRA) equivalent to the next two quarterly payments of principal and interest. Currently, the DSRA consists of a \\$26 million letter of credit provided by ABN Amro ('A+', Outlook Negative).

RATING SENSITIVITIES
The ratings are sensitive to changes in the credit quality of Petrobras as offtaker, implications of the ongoing investigations on SBM and resolution by the CGU of the temporary ban review, and the operating performance of the underlying asset. Changes in Fitch's assessment of the credit quality of SBM may also result in a change in the rating.

Additionally, the ratings are sensitive to changes in the Brazilian oil and gas industry dynamics and on Fitch's perception of Petrobras' willingness to honor the existing conditions under the contracts.

DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.