Brazil State Bank Petrobras Rescue Seen as Blow to Credibility
By David Biller
3:41 PM BRT February 26, 2015
(Bloomberg) — State bank loans for Brazil’s beleaguered state-run oil producer would be a blow to the Finance Ministry’s efforts to shore up market confidence and avoid a sovereign downgrade, say analysts interviewed by Bloomberg.
Brazil’s government offered Petroleo Brasileiro SA as much as 6 billion reais ($2.1 billion) from state banks BNDES, Banco do Brasil and Caixa Economica Federal to strengthen the company’s cash position, newspaper Estado de S. Paulo reported today, citing an unidentified Petrobras executive. Petrobras is reviewing its financial planning and studying other possibilities of financing, the company said in an e-mailed statement Wednesday.
The world’s most-indebted publicly traded oil producer has been locked out of capital markets amid allegations of a kickback scheme, and on Tuesday was downgraded to junk by Moody’s Investors Service. While development bank BNDES has been a source of subsidized lending for Petrobras and other companies, Finance Minister Joaquim Levy is seeking to scale back the practice that helped propel gross debt as a percentage of gross domestic product to the most in at least eight years.
“Announcing a rescue operation of Petrobras would be a very bad signal to the market and bad for the public banks, which right now need to be more selective,” said Sergio Lazzarini, professor at Insper business school and co-author of a book about BNDES. “The government is trying to reduce gross debt and can no longer support public banks lending a lot.”
BNDES, Banco do Brasil, Caixa and the Finance Ministry declined to comment on the possibility of new loans to Petrobras. The board of Petrobras, which had $135 billion in debt at the end of the third quarter, will meet Friday.
Moody’s on Tuesday cut Petrobras’s rating to Ba2, two levels below investment grade, and said further reductions were possible. Standard & Poor’s and Fitch Ratings currently rate Petrobras at the lowest investment-grade levels. Petrobras’s stocks and bonds tumbled after the downgrade, and share prices are down 62 percent since a high in September 2014.
Since President Dilma Rousseff took office in 2011, BNDES has disbursed about $234 billion, fueled by Treasury loans, a practice Levy said he plans to stanch. Transfers from the Treasury to BNDES — which grew 12-fold to 473 billion reais from 2008 to 2014 — are no longer instruments of economic policy, he said in a presentation in Sao Paulo this week.
Direct financial help for Petrobras from public banks is possible as a last resort, or as part of a broader plan of relief measures, according to Joao Augusto de Castro Neves, an analyst at political risk consulting firm Eurasia Group. Measures may include cutting investments, asset divestment, launching an IPO for its distribution arm and adjusting fuel price policy, he said.
“It doesn’t help to just give money to Petrobras and that’s it, because that may increase debt-to-GDP levels, and that may put Brazil’s rating at more risk,” Castro Neves said by phone from Washington. “There’s no silver bullet. What’s going to help Petrobras is time and a set of measures.”
Brazil’s gross debt as a percentage of GDP was 63.5 percent in December, the highest since the series began in December 2006. The government aims to shrink that to below 50 percent in the long term, Levy said last month. Business confidence in Brazil in February fell to its lowest level since the National Industry Confederation began the survey in 2004.
S&P cut Brazil’s rating to BBB- last March, one level above junk, citing the nation’s weakening finances. Moody’s lowered its outlook on the nation’s Baa2 rating to negative in September.
Since Petrobras’s downgrade to junk, the cost to protect the nation’s debt against default for five years has increased 13 basis points, or 0.13 percentage point, the most of all investment-grade countries after Morocco, according to data compiled by Bloomberg. The cost to protect BNDES bonds against default has spiked almost twice that amount, or 24 basis points.