Petrobras Crisis Finds New Victim as Bond Loses 34% in Two Days

Petrobras Crisis Finds New Victim as Bond Loses 34% in Two Days

By Peter Millard Filipe Pacheco Francisco Marcelino

8:22 PM BRT
April 7, 2015

Schahin Oil & Gas SA, a domestic rig supplier to Brazil’s state crude producer, is emerging as the latest casualty of the nation’s sprawling graft scandal.

Schahin’s $651 million of bonds due 2022 have plunged 34 percent in the past two days to a record low 39.19 cents on the dollar after people familiar with the company’s plans said it may file for bankruptcy protection as soon as this month if it’s unable to secure emergency financing. The oil-price rout has lowered rental fees around the globe for the kind of drilling equipment Schahin builds and leases.

The rig operator’s engineering unit is among more than 20 companies temporarily banned from bidding on projects with Petroleo Brasileiro SA for allegedly paying bribes to win contracts in a decade-long kickback scheme. Schahin, which is shutting five rigs it leases to Petrobras, would be the third supplier to file for bankruptcy in the past month as a widening probe into the alleged corruption cuts off access to financing.

“It is another case of a company highly dependent on Petrobras that is going through a credit crunch,” Marcelo Lima, a fixed-income trading manager at INTL FCStone Securities Inc., said by telephone from Miami. “There are no doubts that this is a situation spreading to many others at the moment. We see a lot of sellers of such bonds at the moment.”

Schahin declined to comment on whether it’s seeking financing to avoid filing for bankruptcy and allegations its unit bribed Petrobras executives. Petrobras is complying with all contracts with Schahin and the temporary halt won’t affect its exploration and production targets for this year, it said in an e-mailed response.

Bonds Plunge

Construction and engineering companies Galvao Engenharia SA and OAS SA filed for bankruptcy last month after struggling to repay creditors as they deny allegations that they bribed Petrobras executives for contracts.

In an April 6 statement, Petrobras said it’s working with Schahin to shut operations safely and is reviewing the contractual measures it can take.

The people familiar with Schahin’s plans asked not to be identified because the information isn’t public. Newspaper Estado de S.Paulo first reported on the Rio de Janeiro’s company’s potential bankruptcy filing on Monday.

Schahin’s bonds due 2022 are backed by flows related to a long-term charter and services agreement signed with Petrobras, the rig operator’s biggest client, for a drill ship called Sertao. The notes yield 23.13 percent, or 21.42 percentage points more than U.S. Treasuries.

If Schahin files for bankruptcy, Petrobras could cancel the contract, according to Revisson Bonfim, the head of emerging-market analysis at Sterne Agee & Leach Inc. He speculated that Schahin, whose oil and gas unit has about $4.5 billion in debt, may be parking its drilling fleet to put pressure on its lenders to refinance the obligations.

Financing Crunch

“To me, there only could be two things; they’re basically saying to the banks, ‘All right, this is how ugly things will look, because we’ll shut down all our assets,’” Bonfim said. “The other is they don’t have enough cash to operate them. The holding company depends on its ability to get financing, and if it can’t get financing it can’t send cash to the entities such as Schahin Petroleo e Gas that operate the rigs.”

Standard & Poor’s cut Schahin three levels lower to CCC- on Wednesday.

The company’s financing crunch comes at a time when Petrobras is prioritizing crude extraction over exploratory drilling, reducing demand for the company’s drill ships. The drop in crude prices is also freeing up vessels from international competitors.

Deepwater Drilling

“There’s a glut,” Fabiano Santin, a credit analyst at XP Investimentos CCTVM SA, said by telephone from New York. “There are a bunch of companies out there with rigs that could be used.”

Deepwater producers around the globe are scaling back investments in large projects that are less profitable at current oil prices. Global deepwater drilling activity could decline by as much as 10 percent this year, Schlumberger Ltd. Chief Executive Officer Paal Kibsgaard said on a Jan. 16 conference call.

“What kind of market exists now for a used, ultra-deep driller that might have lost its only client?” Rafael Elias, a Latin America debt strategist at Credit Agricole SA, wrote in a note to clients April 7.

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