OREANDA-NEWS. Fitch Ratings has taken the following rating actions on oil vessel-backed financings sponsored by Odebrecht:

Odebrecht Offshore Drilling Finance Ltd. (OODFL)

--Series 2013-1 senior secured notes due 2023 downgraded to 'BBB-' from 'BBB';
--Series 2014-1 senior secured notes due 2023 downgraded to
'BBB-' from 'BBB'.

Odebrecht Drilling Norbe VIII/IX Ltd.
--Series 2010-1 senior secured notes due 2022 downgraded to 'BBB-' from 'BBB'.

The ratings have been placed on Rating Watch Negative (RWN).

The Odebrecht Drilling Norbe VIII/IX Ltd notes are backed by the flows related to the charter and services agreements signed with Petroleo Brasileiro S.A. (Petrobras) for the use of the dynamically positioned ultra-deepwater (UDW) drillships Norbe VIII and Norbe IX. The OODFL notes are backed by the flows related to the charter and services agreements signed with Petrobras for the use of the dynamically positioned UDW drillships ODN I and ODN II and the UDW semi-submersibles Norbe VI and ODN Tay IV. Odebrecht Oleo e Gas S.A. (OOG, oil and gas arm of Brazilian-based Odebrecht Group) is the operator of the drilling rigs and primary sponsor of the transactions. OOG is the largest Brazilian operator of UDW rigs chartered to Petrobras, with seven operating UDW in its fleet.

The rating actions reflect: (i) Fitch's downgrade to Petrobras, offtaker of the transactions; (ii) potential impact of the Lava Jato investigations on the sponsor's credit quality; (iii) additional impact of the Lava Jato investigations on the transactions, and the potential long term change in oil prices and asset values which may increase the exposure to refinancing risk of both transactions and impact the re-chartering risk for ODN Tay IV and Norbe VI. The ratings are ultimately supported by the strength of the underlying contracts, the growing importance of OOG as an oil service provider and its commitment to improving the performance of the vessels backing the transactions. Furthermore, the majority of the vessels backing these transactions are state of the art assets which provide essential services needed for Petrobras.

KEY RATING DRIVERS

Credit Quality of Petrobras: On Feb. 3, 2015 Fitch downgraded the Issuer Default Ratings (IDRs) for Petrobras, offtaker to the transaction, from 'BBB' to 'BBB-' and placed the ratings on Negative Watch. Petrobras' rating is the implied rating cap for the transactions, as the offtaker represents the main source of cash flow generation. The downgrade reflects the increased and prolonged uncertainty regarding Petrobras' ability to estimate and record an adjustment to its fixed assets on a timely manner, which could allow a significant portion of Petrobras' creditors to accelerate debt payments. The rating actions also reflect the potential impact the current corruption scandal may have on Petrobras' ability to hit Fitch's production expectations. The RWN reflects the heightened risk the company's debt could be accelerated if it is not able to provide year-end audited financial statements within 120 days of the period's end, plus a 60-day grace period.

Credit Quality of the Sponsor: While Fitch does not believe the temporary ban related to the Lava Jato investigations will impact Petrobras' existing contracts with OOG, the ongoing investigations could negatively impact the credit quality of the sponsor group and/ or OOG and, as a result, the structured financings, which are directly and indirectly exposed to the credit quality of OOG and the overall Odebrecht group. The charter and service agreements have termination clauses that include bankruptcy of the sponsor and performance-related deficiencies such as extended down time.

Strength of Existing Contracts: Despite Petrobras' decision to temporarily ban all companies associated with Odebrecht's business group from participating in new contracts and future bidding processes, Petrobras has indicated its intention to continue honoring the terms of existing offshore charter and service contracts. In Fitch's view, the existing contracts supporting the transactions remain in line with market prices and are further supported by Brazilian offshore supply/demand fundamentals. The existing fleet of contracted offshore vessels is essential to the overall production growth strategy of Petrobras and Brazil. Local supply for drillships will continue to be constrained by the delayed delivery of 28 new drillships (Sete Brasil).

Exposure to Market Day Rates and Asset Prices: Fitch's base case analysis for the oil vessel-backed structured finance transactions assumes that the existing underlying contracts remain in place for the duration of the contracts. However, if the temporary ban is further extended or a contract terminates for any other reason, the related transaction could be exposed to then current market conditions. Fitch believes contracted day rates remain in line with current market rates; however, a further long-term decline in oil price may decrease market day rates below contracted day rates. This risk remains mitigated by the relatively moderate loan to values (LTVs) expected when the contracts for Norbe VI and ODN Tay IV are scheduled to expire.

Heightened Re-chartering Risk: OODFL is exposed to some element of re-chartering risk as two of the four assets backing the transaction are scheduled to expire in 2019 (Norbe VI) and 2020 (ODN Tay IV), prior to the scheduled maturity of the program. While Fitch does not believe the current ban will ultimately impact the ability to re-charter in four years, it remains uncertain what impact this may have on OOG's future contracting with Petrobras. Furthermore, a continued decline in oil prices will negatively impact the day rates under which Norbe VI and ODN Tay IV will ultimately be able to contract.

Improving Operating Performance: Although the assets within the Odebrecht portfolio have experienced prolonged downtimes, vessel performance has improved during the last quarter. OOG has committed to work closely with Petrobras and implemented a recovery program to guarantee an improving performance of the vessels. Fitch expects that with these measures, performance will be closer to 95%, which is in line with Fitch's long-term uptime expectations. Sustained performance levels below expectations may trigger further rating actions.

RATING SENSITIVITIES

The ratings are sensitive to changes in the credit quality of Petrobras as offtaker, implications of the ongoing investigations on the Odebrecht and the Brazilian oil and gas industry, the credit quality of Odebrecht, and the operating performance of the underlying assets.

ASSET PERFORMANCE UPDATE

Certain vessels have experienced volatile uptimes and extended operational learning curves during the ramp-up period. Specifically, ODN Tay IV's average quarterly operational uptime was recorded at 48.3% during 2Q 2014 as a result of difficulties with the blowout preventer. Ensuing preventative maintenance caused more downtime, dropping the average operational uptime to 15% for the following quarterly period. OOG and Petrobras have been working closely to improve operational efficiencies within the OOG fleet of vessels. Uptime performance improved notably during the last quarter recorded.