Standard & Poor's put the ratings of future flow transactions of Companhia Vale do Rio Doce and Petroleo Brasileiro (Petrobras) on CreditWatch with positive implications.

The move comes after the agency upgraded the Federative Republic of Brazil's foreign currency rating to BB' from BB-' and the local currency rating to BB+' from BB.'

The upgrade watch for CVRD covers three transactions issued in 2000 for a combined $300 million and a $250 million deal placed in 2003. MBIA wraps a total of $400 million of those deals. The ratings on all the deals are BBB+' on an unwrapped basis.

The potential move for CVRD is linked to what happens to the corporate, whose BBB' is also on CreditWatch positive.

"There's been a one notch differential," said Diane Audino, a director of emerging market structured finance at S&P. "If [the corporate's] ratings are increased, then there's a possibility that the future flow deal would go up."

She added that an upgrade for the corporate would not automatically trigger the same for the transaction, as the agency would also take into account the structure and strength of the cash flows and the risk of sovereign interference.

CVRD is the world's largest producer of iron ore. Collateral for the deals includes exports of the commodity.

The watch for Petrobras covers two deals issued in 2003 for a total of $750 million. The oil exporter has repurchased a multi-tranche deal issued in 2001 for a total of $750 million, according to sources.

Petrobras' chances of an upgrade are bound to the government of Brazil.

"Now the question is whether sovereign interference risk has gone down," Audino said.

She added that performance risk would also be assessed in determining the next ratings move, if any, for the structured deals.

Collateral for Petrobras' deal consists of export receivables of heavy fuel oil and bunker oil.

The sovereign upgrade was remarkable in that it came in a year of a presidential election, which has historically translated into fiscal pressure for the Brazilian government. But this year has been different. Lisa Schineller, director of Latin American sovereign ratings at S&P, said the external debt and international reserve numbers are much healthier now than in the lead up to the last elections. The favorable liquidity environment abroad has also fed into the rosy picture, she added.

Brazil will hold a presidential election in October. While corruption allegations against members of the governing coalition have hurt the re-election chances for President Inacio Lula da Silva, they haven't given rise to a strong contender who would upend the prudent fiscal policy his administration has followed.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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