Petrobras Bondholders’ Doomsday Scenario Averted With Earnings

Petrobras Bondholders’ Doomsday Scenario Averted With Earnings

By Julia Leite Paula Sambo / Bloomberg

8:07 PM BRT
April 23, 2015

For bond investors, the release of Petroleo Brasileiro SA’s audited earnings means a potential disaster was averted: a default with the potential to put billions of dollars of debt repayments in limbo.

That still doesn’t mean investors can breathe easy.

After reporting its first verified results since August, the state-controlled oil producer dogged by allegations of bribery now faces the task of paring its record 282 billion real ($95 billion) debt burden. Accomplishing that will be a challenge when crude prices are close to a six-year low and the company keeps falling short of production targets.

Petrobras will struggle for some time to restore its financial health, which will create a persistent drag on the company’s bonds, say Mizuho Securities Co. and Torino Capital LLC. In February, Moody’s Investors Service cut its rating to junk in part on concern the producer’s failure to report audited results would violate bond terms and allow creditors to demand their money in a technical default.

The results took “default/acceleration off the table,” Allan Grauer, the head of Latin America debt trading at Mizuho, said by e-mail. “Ultimately, they need to prove they can turn the ship around. The company is too levered. I am not too optimistic longer term.”

Graft Writedown

Petrobras said late Wednesday that it lost a record 21.6 billion reais in 2014, ending a five-month delay in releasing financials as it struggled to settle on the costs of an alleged decade-long kickback scheme where executives were bribed in exchange for contracts. In the end, the company announced a corruption-linked writedown of 6.2 billion reais and a 44.6 billion-real impairment, mainly from overpriced and unfinished refinery projects.

For the biggest corporate bond issuer in emerging markets over the past four years, a demand for immediate repayment would have proved a significant challenge. Rio de Janeiro-based Petrobras has $52 billion of overseas bonds outstanding and had $23 billion in adjusted cash and equivalents at the end of last year.

In its Feb. 24 statement cutting the oil producer’s rating by two levels to Ba2, Moody’s highlighted the “risk that creditors could take actions that lead to a declaration of technical default, followed by payment acceleration” if the company didn’t publish financial results.

Earlier that month, hedge fund Aurelius Capital Management LP said in a letter to bondholders that Petrobras remained in violation of bond terms and creditors should notify the oil producer that the infraction would constitute a default if not resolved within 60 days.

‘No Acceleration’

“There has been a reduction in uncertainty and there will be no acceleration,” Jorge Piedrahita, the chief executive officer at Torino, said in an e-mail.

Still, he recommends investors sell the company’s bonds.

“The process to clean all this mess will be of several years,” he said.

To Credit Agricole SA’s Rafael Elias, Petrobras’s bonds will extend gains as oil prices recover.

Petrobras Bonds

Petrobras’s $2.5 billion of bonds due in 2024 rose 1.37 cents Thursday to 99.88 cents on the dollar, leaving them up 6.5 percent this month, data compiled by Bloomberg show. The notes are still down 3.2 percent since November, when the probe into the alleged corruption led to several arrests.

“Things are getting back to normal little by little and fundamentals like oil prices will begin to drive trading again,” Elias said in an e-mail.

As part of its effort to reduce debt, Petrobras is seeking to sell $13.7 billion in assets over the next two years. While Chief Financial Officer Ivan Monteiro said Thursday that Petrobras would consider a dollar-denominated bond sale this year, the company has already met its financing needs for 2015.

“The easy part of the rally is done,” Ryan McGrail, an analyst at Loomis Sayles & Co., said by telephone. “They’re on the right track. The execution of it will be the difficult part.”