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June 27 (The following statement was released by the rating agency)
The Brazilian government's decision to assign the production of the excess volume of the
transfer of right areas to Petrobras will further pressure the company's cash flow generation
ability and weaken its stand-alone credit quality, according to Fitch Ratings. The government's
decision calls for a BRL2 billion bonus payment to the government during 2014
and anticipation of BRL13 billion of profits to the government between 2015 and
2018, significantly before any oil is produced from the assigned areas. These
payments will put additional burden on Petrobras' already negative free cash
flow resulting from its aggressive capex program.
These payments, coupled with the expected downstream losses for this year and
moderate production growth during 2014, would negatively impact the company's
internal cash flow generation and increase reliance on borrowings. Considering
Fitch's price deck, Fitch expected that at the beginning of this year Petrobras'
borrowing needs would be around USD15 billion, on average, over the medium term.
These recent developments could increase the company's needs for external
funding beyond this estimate.
Factors that could result in a negative action on Petrobras' ratings,
independent of a sovereign downgrade, include the perception of a lower linkage
between Petrobras and the government, together with a sustained weakening of the
stand-alone credit metrics. Qualitative factors that could pressure Petrobras'
ratings include a sustained increase in leverage to a total debt/EBITDA ratio of
more than 5.0x. Also, lack of capital market access to fund negative FCF would
be detrimental, as well as failure to increase production over the medium term.