Brazilian bonds, equities and currency were rocked on Wednesday after Moody’s cut its ratings of state-controlled oil company Petrobras to junk status, citing a corruption scandal at the company.
The move by Moody’s — the first rating agency to remove Petrobras’s investment grade rating — sent the company’s share price down 6.7 per cent to R$9.19 by midday in São Paulo, while the Bovespa benchmark index fell 1.22 per cent to 51,243 points.
Spreads on Petrobras’s international bonds widened as much as 50 basis points while the real weakened 1.3 per cent against the dollar to R$2.87, as analysts speculated that rating agencies Standard & Poor’s and Fitch might also be poised to take similar action.
If one or both cuts Petrobras to junk, many institutional investors in the US would no longer be able to hold the bonds, sparking another wave of selling.
“Today’s strong action by Moody’s raises the bar for the other agencies and many market participants may anticipate similar actions from the other two major rating agencies sooner [rather] than later,” Deutsche Bank said in a note.
Moody’s downgrade of Petrobras by two notches to “Ba2” with a negative outlook follows a Brazilian police investigation into a political kickback scheme at the oil company, which has a near monopoly over the country’s deepwater oil reserves.
Petrobras has been unable to calculate its losses from the corruption scheme, preventing auditor PwC from signing off on its books.
This has sparked a crisis of confidence, locking the company and its suppliers out of international capital markets and threatening to trigger a technical default if it cannot produce audited results by the middle of this year.
President Dilma Rousseff, who was chairman of Petrobras until she took office in 2010, appointed a new chief executive this month, but the Moody’s downgrade reflects growing frustration with the slow progress in overhauling the company.
“Moody’s does not yet see any concrete assurance that audited statements will be available by any particular date,” the agency said.
Moody’s does not yet see any concrete assurance that audited statements will be available by any particular date– Moody’s
Petrobras is the fourth-largest issuer of Yankee bonds excluding sovereigns and financial institutions, with about $42bn in bonds outstanding, according to figures from Dealogic.
Some of Petrobras’s most actively traded bonds maturing in 2023 have lost about 10 per cent of their value since November, as yields rose to 7 per cent, according to Bloomberg data. That compares with average yields for dollar-denominated investment grade debt of 2.91 per cent.
Petrobras’s woes are also wreaking havoc on companies in its extended supply chain.
Brazil-based oil and gas services company Schahin Oil and Gas became the latest to have its credit rating downgraded on Tuesday.
Standard & Poor’s cited the company’s inability to extend the maturity profile of its short-term debt.
“The combination of low oil prices, which may jeopardise the economic viability of the pre-salt exploration, and the current corruption investigations at . . . Petrobras . . . have limited the company’s ability to access the bonds market,” Standard & Poor’s said.