Fitch Ratings has affirmed the long-term series 2014-1, 2014-3 and 2018-1 notes issued by Rio Oil Finance Trust at 'BB-'.

The Rating Outlook is Stable.

The ratings are not directly linked to the originator's credit quality. The ratings are based on potential production and generation risk and are ultimately linked to Petrobras' Issuer Default Rating (IDR), as it is the main source of cash flow generation. The ratings are capped at Petrobras' rating level (BB-/Stable), as the largest obligor of royalties and special participations payments. Additionally, the ratings are also capped at Banco do Brazil's rating level (BB-/Stable), given it cannot be replaced as collection account bank.

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

RATING ACTIONS

Entity / Debt

Rating

Prior

Rio Oil Finance Trust

2014-1 76716XAA0

LT

BB-

Affirmed

BB-

2014-1 REGS USU76673AA72

LT

BB-

Affirmed

BB-

2014-3 76716XAB8

LT

BB-

Affirmed

BB-

2014-3 regs USU76673AB55

LT

BB-

Affirmed

BB-

2018-1 76716XAC6

LT

BB-

Affirmed

BB-

Page

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VIEW ADDITIONAL RATING DETAILS

Transaction Summary

The notes issued by Rio Oil Finance Trust, a Delaware-based special purpose vehicle (SPV) constituted for the sole purpose of this transaction are backed by the royalty flows owed by oil concessions, predominantly operated by Petrobras, to the government of the state of Rio de Janeiro (RJS), which has assigned 100% of the flows to RioPrevidencia (RP). For the purpose of this transaction, RP sold its rights to Rio Oil Finance Trust.

KEY RATING DRIVERS

Ratings Not Directly Linked to Originator's: RP is an autonomous government agency that is part of the Secretary of State for Planning and Management of RJS (BB-/Stable). Performance of the originator will not affect the collateral as the generation of the cash flow needed to meet timely debt service is not dependent on either RP or RJS.

Largest Obligor Rating Cap: Petrobras' rating is the ultimate cap for the proposed transaction, as it is the main source of cash flow generation. Petrobras carries Local and Foreign Currency (LC/FC) IDRs of 'BB-'/Outlook Stable and 'AA(bra)'/Outlook Stable. The company is majority controlled by the federal government of Brazil and has the rights to E&P of the vast majority of Brazil's oil fields.

Future Production Risk: The transaction benefits from growth in production levels as it increases the total royalty flows. Depressed oil prices have led Petrobras to reduce production targets on multiple occasions. Nevertheless, Petrobras recently increased their 2023-2027 capital expenditure projection from 2022-2026 projections, and increasing production levels would benefit the transaction in the near to medium term.

Cash Flows Support Rating: The expected levels of annualized average debt service coverage ratios (AADSCRs) over 2.0x partially mitigate the transaction's exposure to fluctuations in oil prices and production levels at the current rating level. Fitch expects AADSCRs to be over 2.0x for the life of the transaction, assuming Law 12,734 is implemented after 2020.

Oil Revenues Dedicated Account Modification Mitigates Redirection Risk: Pursuant to the Oil Revenues Dedicated Account Modification Legislation, the RioPrevi Oil Revenues initially deposited to the RJS Oil Revenues Dedicated Account are no longer required by legislation to be deposited into a state-owned account. Oil revenues assigned to this transaction are instead deposited into an account under the name of the issuer. This change in the account mitigates potential redirection of flows to RJS. As Banco do Brasil (BdB) cannot be replaced as a collection bank, the transaction is directly linked to the credit quality of BdB (BB-/Stable).

Ample Liquidity for Timely Payment: The transaction benefits from liquidity, in the form of a Debt Service Reserve Account (DSRA) and a Liquidity Reserve Account. Funds in deposit in these two accounts shall at all times be sufficient cover three principal and interest (P&I) payments, which is considered sufficient to keep debt service current on the notes under different stress scenarios.

Potential Exposure Political Risk Partially Mitigated: The state's liquidity constraints, evidenced by various delays in commercial and other payments, have heightened the transactions political risk exposure. However, provisions included in the sixth rescission waiver and amendment, such as the rescission of the trapping of excess cash and of the early amortization period, will increase the cash flows returned to the state, and, in turn, decrease the transaction's exposure to potential political risk.

Legal Changes May Affect Collateral Stability: Although, to date, no amendments affecting the distribution of royalties for the existing concession Regime have been implemented, provisions regarding the change in allocation percentages incorporated in Law 12,734 are currently under review. The transaction was analyzed assuming the law will change and DSCRs remain sufficiently robust and commensurate with the expected ratings.

True Sale Valid under Brazilian Law: Collateral backing this transaction was transferred to RP by RJS through a state decree, making RP the legal owner of the royalties. This transfer gives RP the right to sell the collateral into the trust.

Transfer and Convertibility Risk: Series 2014-1, 2014-3 and 2018-1 notes are exposed to transfer and convertibility risk as royalty flows are paid in an account in Brazilian reais. This exposure caps the rating of the transaction at the country ceiling of Brazil, which is currently 'BB'. To partially mitigate operational risk that may arise from transferring and converting flows on a daily basis to an off-shore account, the transaction contemplates reserve funds that covers three P&I payment.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

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

The ratings are capped by the credit quality of Petrobras, the main obligor generating cash flows to support the transaction, and to the sovereign rating and country ceiling assigned to Brazil. A downgrade of Petrobras or the sovereign would trigger a downgrade on the notes;

The ratings are sensitive to the rating of BdB given the excessive counterparty exposure to the transaction; therefore, a downgrade of BdB would trigger a downgrade on the notes.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

The main constraints to the program rating are the ratings of Petrobras and BdB. An upgrade of both Petrobras and BdB, together with sustained high oil prices, which in turn supports growth in production levels, could trigger a positive rating action;

In December 2022, Fitch revised its 'Global Economic Outlook' forecasts as a result of central banks being forced to toughen up in their fight against inflation and China's property market outlook deterioration. Downside risks have increased and Fitch has published an assessment of the potential rating and asset performance impact of a plausible, but worse than expected, adverse stagflation scenario on Fitch's major structured finance (SF) and covered bond (CVB) subsectors ('What a Stagflation Scenario Would Mean for Global Structured Finance'). Fitch expects LatAm's Global Cross-Sector's future flow transactions in the assumed adverse scenario to experience a 'Virtually No Impact,' indicating a low risk for rating changes.

Best/Worst Case Rating Scenario

International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10

Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS

The future flow ratings are ultimately capped by the credit risk of Banco do Brasil S.A. and Petroleo Brasileiro S.A. (Petrobras) as measured by their Long-Term IDR.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

Additional information is available on www.fitchratings.com

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