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Rating Action:

Moody's upgrades Petrobras' ratings to Ba3; changes outlook to stable from positive

17 Oct 2017

New York, October 17, 2017 -- Moody's Investors Service (Moody's) upgraded all ratings of Petroleo Brasileiro S.A. (Petrobras)'s and ratings based on Petrobras' guarantee, including the company's senior unsecured debt and corporate family rating (CFR), to Ba3 from B1. The upgrade reflects Petrobras' material liquidity improvement, declining debt leverage, solid management discipline and strengthened corporate governance. Simultaneously, Moody's raised the company's baseline credit assessment (BCA) to b1 from b2 and changed the outlook to stable from positive.

Upgrades:

..Issuer: Petrobras Global Finance B.V.

....Senior Unsecured Shelf, Upgraded to (P)Ba3 from (P)B1

....Senior Unsecured Regular Bond/Debenture, Upgraded to Ba3 from B1

..Issuer: Petrobras International Finance Company

....Subordinate Shelf, Upgraded to (P)B1 from (P)B2

....Senior Unsecured Shelf, Upgraded to (P)Ba3 from (P)B1

....Senior Secured Shelf, Upgraded to (P)Ba2 from (P)Ba3

....Senior Unsecured Regular Bond/Debenture, Upgraded to Ba3 from B1

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

.... Corporate Family Rating, Upgraded to Ba3 from B1

....Subordinate Shelf, Upgraded to (P)B1 from (P)B2

....Senior Unsecured Shelf, Upgraded to (P)Ba3 from (P)B1

....Senior Secured Shelf, Upgraded to (P)Ba3 from (P)B1

....Pref Shelf, Upgraded to (P)B3 from (P)Caa1

Outlook Actions:

..Issuer: Petrobras Global Finance B.V.

....Outlook, Changed To Stable From Positive

..Issuer: Petrobras International Finance Company

....Outlook, Changed To Stable From Positive

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

....Outlook, Changed To Stable From Positive

RATINGS RATIONALE

The actions on Petrobras' ratings and BCA reflect the company's better credit metrics and material liquidity improvement, specifically related to a more comfortable debt maturity profile, derived from ongoing debt refinancing and solid cash generation. So far in 2017, Petrobras tapped the capital markets for USD19.2 billion in bonds, mostly global, proceeds from which were used to refinance debt maturities. The company also reduced debt by USD10 billion from June 2016 to June 2017, with proceeds from asset sales and cash generation, while keeping a robust amount of cash on hands of USD24.5 billion in June 2017. In addition, cash flow has become more predictable as a result of relatively stable crude oil prices, a clear domestic fuel price policy since late 2016, declining operating costs and disciplined capital investment that has supported increasing production and better Exploration and Production margins. Furthermore, "Petrobras is on track to reach by year end 2018 its own leverage target of 2.5x net debt debt/EBITDA, which we estimate will be below 3 times at year end 2017", said Nymia Almeida, a VP-Sr. Credit Officer at Moody's.

Asset sales, proceeds from which help reduce debt, has slowed in 2017 as a result of the federal audit office (TCU)'s review process. However, asset sales are less relevant now for Petrobras' liquidity position than 12 months ago given the company's smoother debt maturity profile, higher cash flow visibility, and robust and stable amount of cash on hands.

There is still uncertainty around the SEC and DoJ bribery investigations and the resulting consequences for the company. However, the probability that Petrobras is fined an amount that will significantly and negatively affect its liquidity position has declined. Since Lava Jato's investigations started in early 2014, the company improved its corporate governance and managed to settle with 21 out of 27 individual investors on legal disputes related to corruption and bribery investigations. Moreover, solid operating result in the last couple of years, despite low oil prices, increases cash flow visibility in the medium term, which reduces the risk that the company's credit profile will be significantly negatively affected by fines.

Petrobras' b1 BCA and Ba3 ratings are supported by the company's dominance in the Brazilian oil industry and its importance to the Brazilian economy. Furthermore, the ratings reflect the company's sizeable reserves at 9,592 Mboe as of December 31, 2016 (equivalent to over 10 years of life), its renown high technological offshore expertise and potential for continued growth in production over the long-term. However, Petrobras' ratings are constrained by high debt levels, business plan execution risk and, to a lesser extent, potential negative impact from fines related to Lava Jato. Petrobras' Ba3 ratings also consider Moody's joint-default analysis for the company as a government-related issuer. Petrobras' ratings reflect the assumption for moderate support and dependence from the Government of Brazil (Ba2 negative) based on Petrobras' demonstrated ability to lower its liquidity risk and thus reduce the potential need of support, as well as the government's resilient tight fiscal position.

The stable outlook on Petrobras' ratings incorporates Moody's view that the company's credit profile will continue to improve gradually, which however is counterbalanced by the negative outlook on the government of Brazil's Ba2 rating.

Positive rating actions could occur if Petrobras raises sufficient sums through asset sales to further reduce debt while also improving operating and cash flow performance. Accordingly, for a rating upgrade to occur, Petrobras' leverage as adjusted by Moody's should move sustainably below 3.5 times. In addition, because Petrobras is a sovereign owned enterprise, an upgrade of its ratings would consider Moody's expectations for the credit profile of Brazil's government.

Negative actions on Petrobras' rating could result from a deterioration in operating performance or external factors that increase liquidity risk or debt leverage from current levels. Downgrades could also be prompted if negative developments from the litigations against Petrobras appear to have the potential to significantly affect the company's liquidity or financial profile.

The methodologies used in these ratings were Global Integrated Oil & Gas Industry published in October 2016, and Government-Related Issuers published in August 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Petrobras is an integrated energy company, with total assets of USD244 billion as of June 30, 2017. 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
Mexico
JOURNALISTS: 1 888 779 5833
Client Service: 1 212 553 1653

Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 800 891 2518
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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