OREANDA-NEWS. Fitch Ratings has placed the following Rio Oil Finance Trust issuances on Rating Watch Negative:

--USD2 billion series 2014-1 notes 'BB+';
--BRL 2.4 billion series 2014-2 special indebtedness interests to 'AAsf(bra)';
--USD1.1 billion series 2014-3 notes 'BB+'.

The ratings address timely payment of interest and principal on a quarterly basis.

The Negative Watch reflects the potential impact the waiver conditions approved by bondholders might have on the transaction's coverage levels in case some of the milestones are not met within the waiver period. Milestone completion would subordinate other obligations to the transaction debt service and partially decrease the step-up coupon, lessening the impact of the initial waiver conditions.

The issuances are backed by the 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), who assigned 100% of the flows to RioPrevidencia (RP), the state's pension fund.

KEY RATING DRIVERS

Approval of Waiver Proposal: After the breach of the forward-looking DSCR trigger, bondholders approved a waiver proposal which consists, among other things, of a step-up coupon of 300 bps. This step-up coupon might be decreased by 100 bps in case three milestones are reached. The milestones intend to make contributions to FECAM subordinate to the transaction, and to restructure the amortization schedule of series 2014-2 and the federal debt.

The initial waiver conditions increase transaction leverage, which makes the transaction more dependent on production increases and oil price recovery. However, if the milestones are met the impact of this increase in leverage would be mitigated. If the milestones are not met the reduction in coverage levels might lead to a negative rating action.

Future Expected Production Increases at Risk: Impact of revised Petrobras production plan on Rio de Janeiro fields is yet to be assessed, but continued depressed oil prices may further impact production expectations as Petrobras' investment plan released on June 29, 2015 was based on an oil price of USD60, translating into lower than expected DSCR levels. Nevertheless Fitch does not expect this to have a large impact on the short-term production levels.

Potential Increase in Political Risk: Retention of part of the excess cash flows in combination with the State's weaker credit profile and heavier debt service decrease the sponsor's incentive to support the transaction and increase the exposure of the transaction to political risk.

RATING SENSITIVITIES
Failure to meet the milestones contemplated in the waiver might lead to a negative rating action on the transaction ratings.

Additionally, the ratings are capped by the credit quality of Petrobras as the main obligor of the flows backing this transaction and to Brazil's sovereign and country ceiling ratings.

The transaction is exposed to price and volume risk related to oil production. Further declines in prices or production levels significantly below expectations may trigger downgrades.

Although the transaction rating is not directly linked to the originator's rating, in case of considerable downgrade of the state's rating, the rating of the transaction may be impacted negatively.

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.