OREANDA-NEWS. Fitch Ratings has downgraded the foreign and local currency Issuer Default Ratings (IDRs) and outstanding debt ratings of Petroleo Brasileiro S.A. (Petrobras) to 'BBB-' from 'BBB'. Concurrently, Fitch has placed all of Petrobras' international and national scale ratings on Rating Watch Negative. These rating actions affect approximately USD50 billion of issued debt, including debt issued by PIFCO and PGF, which Petrobras unconditionally and irrevocably guarantees. For a complete list of ratings, please refer to the end of press release.

KEY RATING DRIVERS

The downgrade reflects the increased and prolonged uncertainty regarding Petrobras' ability to estimate and record an adjustment to its fixed assets in a timely manner, which could allow a significant portion of Petrobras' creditors to accelerate debt payments. Petrobras' third quarter financial statements, while allowing it to comply with covenants, did not include any adjustments to fixed assets. The lack of clarity prolongs the uncertainty surrounding the company's ability to make the necessary adjustments to comply with covenants that require it to report audited year-end financials within 120 days of the period's end, plus a 60-day grace period. Without audited financials, the company lacks access to debt capital markets. The decision to delay the recording of an impairment highlights the difficulties of estimating the magnitude of the corruption overpayments and fair value of fixed assets.

The rating actions also reflect the potential impact the current corruption scandal may have on Petrobras' ability to hit Fitch's production expectations. The corruption scandal affects the company's effectiveness in negotiating with equipment suppliers, as its executives exercise caution when signing or amending contracts; the current ban on 23 business groups limits the availability of key equipment. Both issues could hurt the timing of the completion and delivery of floating, production, storage and offloading (FPSO) units, which Fitch had anticipated will face an average delivery delay of six months. Fitch will continue monitoring the progress of the construction of Petrobras' FPSO.

The Rating Watch Negative reflects heightened risk the company's debt could be accelerated if it is not able provide year-end audited financial statements within the aforementioned timeframe. Petrobras' ratings could be downgraded by more than one notch should the company breach covenants with regards to its financial statements and receive notification from creditors of such event. If Petrobras publishes audited financial statements in a timely manner so it does not to breach covenants, the Rating Watch Negative will likely be removed and a Negative Rating Outlook would likely be assigned due to continued uncertainty and litigations generated by the ongoing Lava Jato corruption investigation as well as the potential delay in delivery of production units beyond Fitch's initial assumptions, which had led to an expected projected output of 3.5 million boe/d by 2018.

Petrobras' 'BBB-' and 'AAA (bra)' ratings continue to reflect its close linkage with the sovereign of Brazil due to the government's control of the company and its strategic importance to Brazil as its near monopoly supplier of liquid fuels. Absent implicit and explicit government support, Petrobras' credit quality is not commensurate with an investment grade rating. The linkage is evidenced by the decision to maintain gasoline and diesel prices at the pump significantly above international levels in order to bolster Petrobras' cash flow generation. This support has also been reflected by the government's financial support of Petrobras through its various lending agencies. Fitch expects Petrobras to be able to obtain financing from BNDES, as it has done so in the past, should the company need a liquidity injection to make front to cash flow deficit in the near term. As of December 2013, Petrobras' debt with BNDES represented approximately 16% of its total debt. By law, the federal government must hold at least a majority of Petrobras' voting stock. The government currently owns directly and indirectly 60.5% of Petrobras' voting rights and has an overall economic stake in the company of 48.9%. Petrobras cash position is sufficient to meet its short term funding needs.

Fitch believes the current price difference between domestic products and international markets is unsustainable in the long term and expects the differential to erode overtime, eliminating temporary trading gains. As a result, growing production remains strategic for Petrobras to have a strong balance sheet in the long term commensurate with an investment grade rating. Petrobras currently benefits from low international oil prices as the company is a net importer and it has not revised downwards domestic gasoline and diesel prices. Fitch estimates the company's current realization price for sale of liquid fuels ranges between USD80/boe and USD85/boe while WTI has ranged between USD45/bbl to USD50/bbl over the past few weeks.

RATING SENSITIVITIES

The inability of Petrobras to quantify and record impairment charges before breaching covenants could trigger a negative rating action. As previously mentioned, the Rating Watch Negative reflects heightened risk the company's debt could be accelerated if it is not able to provide year-end audited financial statements within the aforementioned timeframe. If the company provides financial statements and avoids breaching covenants, the Rating Watch Negative will likely be removed and a Rating Outlook of Negative may be assigned.

A negative rating action on the sovereign to Petrobras' current rating level will not automatically trigger an immediate downgrade for the company. A positive rating action is highly unlikely in the short to medium term, nevertheless, direct explicit support from the government could help stabilize the ratings and to the extent support is material the ratings could be equalized again in the long term.

Fitch takes the following ratings actions on Petrobras' ratings and places on Rating Watch Negative:

--Foreign currency IDR downgraded to 'BBB-' from 'BBB';
--Local currency IDR downgraded to 'BBB-' from 'BBB';
--National long-term rating of 'AAA (bra)' placed on Rating Watch Negative.

Petrobras International Finance Company (PIFCO)
--Foreign currency IDR downgraded to 'BBB-' from 'BBB';
--International debt issuance downgraded to 'BBB-' from 'BBB'.

Petrobras Global Finance B.V. (PGF)
--Foreign currency IDR downgraded to 'BBB-' from 'BBB';
--International debt issuance downgraded to 'BBB-' from 'BBB'.