Petrobras’s China Cash Stems Bond Tumble But Comes With a Stigma

Petrobras’s China Cash Stems Bond Tumble But Comes With a Stigma

By Julia Leite Paula Sambo

8:00 PM BRT
April 5, 2015

Brazil’s state-run Petroleo Brasileiro SA may be putting itself in the company of some of Latin America’s most distressed borrowers by turning to China for loans, but its bondholders don’t mind.

They’re just thrilled to see the oil producer get its hands on $3.5 billion of cash. The company’s benchmark bonds rallied the most in more than three months after the agreement with China Development Bank Corp. was announced April 1, rebounding after falling to a record low in March.

Petrobras’s success in finding untraditional financing — emulating moves by the junk-rated governments of Venezuela and Ecuador — shows the company hasn’t been totally hamstrung by a corruption probe that cost the chief executive officer her job. It’s a rare piece of good news for a producer that has lost more than a third of its market value and seen its bond yields soar since November, when allegations surfaced that executives demanded millions of dollars in bribes for work contracts.

“At least investors can see that even if it has to be this way, Petrobras can still find ways to fund its short-term operations,” said Rafael Elias, a Latin America debt strategist at Credit Agricole SA. “Chinese loans have been flowing into troubled countries like Venezuela when other sources close up.”

While investors don’t want new securities from Petrobras, one of the biggest emerging-market bond issuer over the past four years, seeing other lenders willing to step up is easing their concerns about a potential cash shortfall. Yields on the company’s $2.5 billion of bonds due 2024 fell to 6.93 percent on Thursday, from a peak of 8.23 percent reached March 17.

Cooperation Plans

Petrobras hasn’t delivered audited financial reports since the second quarter of 2014 as it tries to account for corruption-related losses, a delay which has all but closed dollar debt markets for Brazilian companies. Under Chief Executive Officer Aldemir Bendine, who took over in February, Petrobras announced plans to sell $13.7 billion in assets this year and next to reduce debt and fund investments.

The $3.5 billion agreement with China’s development bank is the first part of an accord to be implemented this year and in 2016, Petrobras said in a regulatory filing Wednesday. The company’s press office declined to comment on details of the financing contract in an e-mailed response to questions.

“Both parties confirmed their intention to work on further cooperation in the near future,” the company said in the filing, adding that the contract will further “the strategic partnership between China Development Bank and Petrobras.”

Latin America

This isn’t the first time Petrobras has turned to China for financing. In 2009, when the company’s borrowing costs were lower, it signed a $10 billion loan with China Development Bank. Last year, Bank of China Ltd. became the first Chinese lender to underwrite a Latin American debt offering when it helped arrange a $8.5 billion bond sale for Petrobras.

“It is important to pay attention to what the government gave as collateral to the Chinese, probably the guarantee it will sell oil for cheap,” Carlos Gribel, the head of fixed income at Andbanc Brokerage LLC in Miami, said by e-mail.

Lenders from the Asian nation have also provided a hand elsewhere in Latin America, with China doling out almost $120 billion in loans to the region since 2005, according to research organization Inter-American Dialogue. Ecuador’s debt securities have returned 4.4 percent this year, above the 2.8 emerging-market average, as President Rafael Correa said he had lined up more than $7.5 billion in loans from China.

Investment Grade

China has lent $45 billion to Venezuela over the past decade, including a $20 billion outlay from the development bank in 2010 that is being repaid in oil exports. President Nicolas Maduro said he secured pledges of $20 billion of investment from the Asian nation in a visit in January.

Two calls to the news department of China Development Bank, and a fax seeking comments on the terms of the Petrobras loan, went unanswered on Sunday.

While Petrobras is relying on the same source of financing as Venezuela and Ecuador, its standing with creditors is significantly better. Standard & Poor’s and Fitch Ratings both rate the producer as investment grade, while Ecuador and Venezuela are in junk territory.

“I don’t think they get an additional demerit or additional negative point based on who the lender is,” David Tawil, president of New York–based hedge fund Maglan Capital, said by telephone. “The most important thing is that they now have the money and liquidity.”

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