Petrobras long-term debt rating cut by Moody's on cash flow woes

RIO DE JANEIRO Thu Oct 3, 2013 7:53pm EDT

RIO DE JANEIRO Oct 3 (Reuters) - Moody's Investors Service downgraded the debt of Brazil's state-run oil company, Petroleo Brasileiro SA, on Thursday on concern that fuel subsidies and huge investment commitments will cause its debt to grow until at least 2015.

Moody's cut the rating on the long-term, foreign currency debt of Petrobras, as the oil company is known, to "Baa1" from A3. Debt in Moody's Baa range "is subject to medium credit risk" and "may posses certain speculative characteristics." While still "investment grade," Baa1 is the highest rated debt with speculative aspects, according to Moody's.

The downgrade comes as a rebuke to Chief Executive Officer Maria das Gra├žas Foster, who has made controlling costs one of the main goals of her nearly two years at the Rio de Janeiro-based company.

While the new rating is three notches away from non-investment grade, a level that would require many pension funds and major investors to sell its debt, the outlook for the company is negative, Moody's said.

In late 2012, Petrobras debt exceeded its own internal limit of 2.5 times earnings before interest, taxes, depreciation and amortization (EBITDA). Debt soared as domestic fuel subsidies, declining output and a $237 billion expansion plan, the world's largest corporate spending program, crimped revenue, even as costs soared. Significantly increased production is still several years away.

"We see Petrobras' leverage to be at nearly peak levels in 2013 and 2014, significantly higher than those of its industry peers and only likely to decline in 2015 and beyond," Thomas Coleman, a Moody's senior vice president, said in a statement.

"Successful execution on its ambitious capital program and delivery on aggressive production targets will be key to reducing leverage in the next few years and to stabilizing the rating outlook."

Petrobras had $112.4 billion of debt as of June 30, 17 percent more than a year earlier. Net debt, or debt minus cash and marketable securities, was $79.6 billion.

The company's spending is likely to be almost double its own cash generation from operations, and debt rose by $16.8 billion in the first half of 2013, Moody's said.

Petrobras did not immediately have a comment on the downgrade.

The company now has $11.25 of debt for every barrel of proved reserves and it has $64,000 of debt for each barrel of daily output, the highest level of similar integrated oil companies such as Exxon Mobile Corp and Royal Dutch Shell Plc, or state oil companies such as Colombia's Ecopetrol SA and Mexico's Pemex.

Moody's on Wednesday lowered its outlook on Brazil's sovereign debt rating to "stable" from "positive," as the country's economy struggles with the impact of three years of low growth, flagging investment and swelling debt.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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