Fitch Rates Petrobras' $4B Note Issuance Due 2020 and 2040

Fitch Ratings has assigned a 'BBB' rating to Petroleo Brasileiro S.A.'s (Petrobras) proposed US $4 billion multi-tranche senior unsecured global notes of which US $2.5 billion mature in 2029 and US $1.5 billion in 2040. Coupons on these notes are 5.75% and 6.875%, respectively. The notes are issued through its wholly owned subsidiary, Petrobras International Finance Company (PifCo) and are unconditionally and irrevocably guaranteed by Petrobras. Proceeds will be used to refinance the outstanding portion of the bridge loans the company borrowed earlier this year.

Petrobras' ratings are supported by its leadership position in the Brazilian domestic energy market, its recognized expertise in offshore exploration and production and its strategic importance to Brazil whose Issuer Default Rating (IDR) is 'BBB-' with a Stable Outlook by Fitch. Over the past several years, a strong pricing environment has allowed Petrobras to implement various strategic initiatives aimed at ensuring its long-term growth in production and hydrocarbon reserves while improving its credit profile.

Additionally, significant discoveries strengthen further Petrobras' position in the global oil and gas industry. Also, Fitch recognizes the positive credit effect of the market-oriented measures implemented over the past several years as well as improvements in corporate governance. Petrobras has established, at the highest levels of the organization, a commitment to transparency and best practices akin to that of private-sector enterprises.

These factors are tempered by vulnerability to fluctuations in international commodity prices, exposure to local political interference, currency risk, domestic market revenue concentration and significant medium-term capital-investment requirements, which will substantially increase leverage and weaken credit metrics during the current downturn in the economic cycle.

As a result of Petrobras' US $174 billion five-year investment plan, leverage is expected to increase by approximately US $30 billion over the next five years. This will drive credit metrics to weak levels for its current ratings until 2010. Fitch anticipates the incremental cash flow from investments in prior years and oil prices recovery to improve credit metrics in line with its historical levels by 2011. A deviation from this expectation would put pressure on credit quality. Also, investments in exploration and production (E&P) of about US $100 billion over 2009-2013 significantly improve the production and reserve growth prospects of the company.

Fitch also factors in its ratings no change in regulation over Petrobras' current concessions as proposed by the new regulation for the pre-salt area currently being discussed by Congress. With the new regulatory framework, Petrobras' production and reserve growth prospects would improve even further. Petrobras would take a more active role in the sector and the government would increase its control of the industry. Significant investments required to develop a potential transfer of up to 5 billion boe from the government could result in a sharp increase in leverage beyond 2013. Fitch sees net leverage, adjusted net leverage, and total debt over proved developed reserves of 1.25 times (x), 2.25x, and USD7/barrel, respectively, to be consistent with Petrobras' current ratings.


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