Petrobras extends market reach as dollar pressures weigh

Fri Feb 14, 2014 2:26pm EST

NEW YORK, Feb 14 (IFR) - Financing pressures are sending Petrobras farther afield as it seeks to ease pressures on a dollar curve that has traditionally borne the brunt of its massive capex plan.

A tap in an obscure German private placement market as well as a rare domestic offering are seen as part of the Brazilian oil company's efforts to diversify its reach among international investors.

Easing pressure on its dollar curve has become all important for what is now one of the world's most indebted companies, especially ahead of an annual dollar foray that grows in size each year and subsequently sends funding costs higher.

"You have this supply (issue) hanging over the market, so why buy their bonds in the secondary when you are waiting for this big deal to come," said a New York based banker. "They have nowhere to hide; they need to do a big dollar deal."

By extending its reach to a broader variety of markets and raising substantial sums among domestic investors the company hopes to send a strong message to dollar accounts that they are not the only game in town, bankers say.

For instance, the quasi-sovereign is forging ahead with what is thought to be the first LatAm corporate issuance in the Schuldschein private placement market, following in the footsteps of regional development bank CAF which tapped this market twice in 2012.

"LatAm corporates are rare," said a Europe-based banker. "It is typically used for German mid-caps trying to access the capital markets for the first time without too much disclosure."

The size of the deal has yet to be announced, but Schuldschein trades typically range between 100m and 300m. There are exceptions - CAF's deals, for instance, were less than 100m each and domestic firm Siemens had made an unusually large 1.35bn offering.

With an ambitious US$236.7bn 2013-2017 capex plan to fund, Petrobras tends to favour jumbo trades. This raises the question of why it has opted for what is a comparatively shallow market, where not all investors are qualified to buy its bonds.

"Petrobras would not be bought by the German savings banks, as they need a local connection," said the banker.

OPEN TO DEBATE

The deal comes on the back of a US$5bn equivalent euro-sterling offering in January when Petrobras came flat to inside its dollar curve. Yet how pricing is faring in the Schuldschein transaction is open to debate. The longer tranches look expensive, but the shorter-dated paper is arguably coming at cost-effective levels.

The HSBC-led transaction comprises four tranches with spread guidance of euro mid-swap/six-month Euribor heard at plus 240bp-250bp on the six-year tranche, 260bp-270bp on the eight-year piece, 300bp-310bp on the 10-year portion and 5.375%-5.500% yield on the 15-year tranche.

The price differential may be because the longer-dated paper is likely targeted at institutional accounts that have higher absolute yield targets than the spread-focused banks that generally participate in the shorter tranches.

"You have to change your approach with insurance companies as they look at absolute yields," said the banker.

For instance, the company's euro-denominated 2023 has been trading at mid-swaps plus 265bp, substantially inside the 300bp-310bp guidance on the equivalent tenor in the Schuldschein offering.

But with its 2018 being quoted at mid-swaps plus 220bp, the shorter-dated tranches look reasonable and on balance, pricing makes sense, especially given Petrobras' need to diversify its funding base.

"Keep in mind that the issuer can have different targets when trying to issue such a deal," said the European banker. "One could be diversification into the euro currency and away from dollars."

DOMESTIC DISPLAY

Similar reasoning is being applied in Brazil's local markets where Petrobras is expected to raise at least R$1bn in its first plain vanilla trade since 2002.

Up until now it has largely sold asset-backed domestic debt to finance the construction of various buildings. Being a dollar focused borrower, however, it has rarely leaned on local issuance to fund capex, a Sao Paulo-based banker said.

"They are trying everything they can and that is why they will do something in the local market this year," he said.

Brazilian miner Vale's recent local foray has no doubt provided some inspiration for Petrobras after its R$1bn multi-tranche, tax-exempt offering came flat to inside government benchmarks.

Petrobras is thought to be waiting for amendments to laws that would allow it to issue tax free bonds as well and reach beyond the plethora of retail accounts that drove the Vale issue.

"Vale went to qualified retail accounts, but if Petrobras comes it will go to non-qualified investorsto raise more," the banker said.

A display of strength in the Brazilian debt markets may go a long way toward showing US investors that the highly indebted company has other financing options.

While R$1bn is the size being discussed, some bankers expect the company to target a larger deal to demonstrate to US accounts that it has access to other deep pools of liquidity.

"They think in dollars and that is why Petrobras took so long (to issue domestically), but now the company is more fragile and they are in a different situation," said the banker.

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