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Rating Action:

Moody's downgrades Petrobras' to Ba3 and places ratings on review for downgrade

09 Dec 2015

New York, December 09, 2015 -- Moody's Investors Service ("Moody's") downgraded all ratings for Petroleo Brasileiro S.A. ("Petrobras") and ratings based on Petrobras' guarantee, including the company's senior unsecured debt rating, to Ba3 from Ba2. Simultaneously, Moody's placed the ratings on review for possible further downgrade. The company's baseline credit assessment (BCA) was lowered to b3 from b2. The rating and outlook for the unguaranteed ratings of Petrobras Argentina are unchanged, including the (P)B2 senior unsecured, positive.

These rating actions reflect Petrobras' elevated refinancing risks in the face of deteriorating industry conditions that make it more difficult to raise cash through asset sales; tighter financing conditions for companies in Brazil and in the oil industry, coupled with the magnitude of eventual needs to finance debt maturities; as well as the company's negative free cash flow. The rating actions also considered Moody's December 9th, 2015 decision to place Brazil's government Baa3 bond rating under review for possible downgrade. For more information, please see "Moody's places Brazil's Baa3 issuer and bond ratings on review for downgrade" available at moodys.com.

Ratings downgraded and placed under review:

Downgrades:

..Issuer: Petroleo Brasileiro S.A. - PETROBRAS

.... Corporate Family Rating, Downgraded to Ba3 from Ba2; Placed Under Review for further Downgrade

....Preferred Shelf, Downgraded to (P)B3 from (P)B2; Placed Under Review for further Downgrade

....Subordinate Shelf, Downgraded to (P)B1 from (P)Ba3; Placed Under Review for further Downgrade

....Senior Secured Shelf, Downgraded to (P)Ba3 from (P)Ba2; Placed Under Review for further Downgrade

....Senior UnsecuredShelf, Downgraded to (P)Ba3 from (P)Ba2; Placed Under Review for further Downgrade

..Issuer: Petrobras Global Finance B.V.

....Backed Senior Unsecured Regular Bond/Debenture, Downgraded to Ba3 from Ba2; Placed Under Review for further Downgrade

..Issuer: Petrobras International Finance Company

....Backed Subordinate Shelf, Downgraded to (P)B1 from (P)Ba3; Placed Under Review for further Downgrade

....Backed Senior Secured Shelf, Downgraded to (P)Ba2 from (P)Ba1; Placed Under Review for further Downgrade

....Backed Senior Unsecured Shelf, Downgraded to (P)Ba3 from (P)Ba2; Placed Under Review for further Downgrade

....Backed Senior Unsecured Regular Bond/Debenture, Downgraded to Ba3 from Ba2; Placed Under Review for further Downgrade

Outlook Actions:

..Issuer: Petroleo Brasileiro S.A. - PETROBRAS

....Outlook, Changed To Rating Under Review From Stable

..Issuer: Petrobras Global Finance B.V.

....Outlook, Changed To Rating Under Review From Stable

..Issuer: Petrobras International Finance Company

....Outlook, Changed To Rating Under Review From Stable

RATINGS RATIONALE

Petrobras' Ba3 ratings reflect Moody's joint-default analysis for the company, which is a government-related issuer. Petrobras' b3 baseline credit assessment (BCA) indicates Moody's view of its standalone credit strength, and considers the company's high financial leverage, negative free cash flow, and operating challenges in a difficult environment. "The rating downgrade to Ba3 was based on Moody's view that Petrobras' financial strength has weakened and refinancing risk has increased. The company's goal to meaningfully deleverage through capital spending reductions, operating improvements, and raising USD 15 billion from asset sales over the next 12 months carries high execution risk under current depressed energy industry conditions and may limit oil production growth in the medium term", said Nymia Almeida, a VP-Sr. Credit Officer at Moody's Investors Service. "Free cash flow will remain negative in the foreseeable future as international oil prices remain weak, even though downstream losses are limited by stable local prices for oil products; further local currency devaluation is another significant risk to downstream results", added Almeida. The company also faces challenges related to corruption investigations, which create management distractions that may hinder efforts to improve the company's financial profile and also carries the risk of significant losses due to fines. In turn, Petrobras' b3 BCA and Ba3 rating are supported by the company's large-scale reserve base and dominance in the Brazilian oil industry, and its importance to the Brazilian economy. Furthermore, the ratings reflect the company's sizeable pre-salt reserves, its technological offshore expertise and potential for continued growth in production over the long-term.

Moody's joint-default analysis continues to assume a high probability of support from the government of Brazil. The agency's assumption for default dependence between Petrobras and the government continues to be moderate. This assessment currently results in a three-notch uplift of Petrobras' senior unsecured rating to Ba3 from its b3 BCA.

Petrobras has significant refinancing risk. It has about USD 24 billion in debt maturing in 2016-2017 and roughly USD 25 billion in cash holdings, of which about USD 10 billion represents operating cash. Alternative sources of funding are limited in Brazil as local banks face their own capital restrictions. Petrobras has recently looked overseas, raising USD 5 billion from the China Development Bank (Aa3 stable) and signing a USD 2 billion, 10-year sale-leaseback agreement on two oil platforms with the Industrial and Commercial Bank of China Financial Leasing ("ICBC Financial Leasing Co., Ltd." A2 stable). In addition, practically all of Petrobras's assets are unencumbered and could secure new loans.

The company plans to direct USD 19 billion to capital spending in 2016, a 50% reduction from the 2011-14 average, in an effort to protect cash, which raises operating concerns with regards to production growth. In addition, although international prices of oil products have been lower than local prices and these are not adjusted down when international prices decline, price increases in Brazil have not been enough to offset the over 50% local currency devaluation in the first nine months of 2015, which negatively affected purchases of crude and imports of gasoline and diesel.

The review of Petrobras' ratings will focus on the company's refinancing risk, which exacerbates liquidity risk; in this regard, Moody's will review the company's ability to access credit markets and sell assets as well as its operating performance, including the ability to substantially improve margins and sustain production growth. The review will also encompass the likelihood that the government of Brazil will be able to provide adequate timely support in case of need. Despite the government's stated willingness to stand behind Petrobras, its current weak fiscal situation as well as the country's fragile economic and political situation may prevent the government from fully supporting Petrobras to avoid a default. As a consequence, the current assumption of high support could decline and the number of notches uplift from Petrobras' b3 BCA could also decline.

For further detail about the company's ratings please refer to the latest Credit Opinion in www.moodys.com.

The principal methodology used in these ratings was Global Integrated Oil & Gas Industry published in April 2014. Other methodologies used include the Government-Related Issuers methodology published in October 2014. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Petrobras, based in Rio de Janeiro, is an integrated energy company, with total assets of USD 234 billion as of September 30, 2015. Petrobras dominates Brazil's oil and natural gas production, as well as downstream refining and marketing. The company also holds a significant stake in petrochemicals and a position in sugar-based ethanol production and distribution. The Brazilian government directly and indirectly owns about 46% of Petrobras' outstanding capital stock and 60.5% of its voting shares.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Nymia C. Almeida
VP - Senior Credit Officer
Corporate Finance Group
Moody's de Mexico S.A. de C.V
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No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
Mexico
JOURNALISTS: 001-888-779-5833
SUBSCRIBERS:52-55-1253-5700

Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

Releasing Office:
Moody's Investors Service, Inc.
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SUBSCRIBERS: 212-553-1653

Moody's downgrades Petrobras' to Ba3 and places ratings on review for downgrade
No Related Data.
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