Oil and Gas

Petrobras reopens foreign debt markets for Brazilian corporates

NEW YORK, May 19 (IFR) - Oil firm Petrobras threw open the door for Brazilian corporate issuance this week after printing a US$6.75bn bond - the first domestic company to sell foreign debt since June 2015.

Days before Petrobras took the plunge, bankers were spying a window of opportunity for Brazilian borrowers on hopes a new business friendly government would pull Latin America’s largest economy out of its worst slump in decades.

Petrobras responded by printing five and 10-year bond on Tuesday - a few days after Congress agreed to start impeachment proceedings against former president Dilma Rousseff and replace her with Michel Temer.

The quasi-sovereign got an overwhelming reception with order books reaching US$21bn for the US$5bn five-year and US$1.75bn 10-year tranches.

This strong demand helped the state-controlled entity squeeze pricing 25bp-37.5bp before printing at a final yield of 8.625% on a US$5bn five-year and 9.00% on US$1.75bn 10-year.

The large order book underscored appetite for a credit seen benefiting from the recent change to a government capable of reviving economic growth in Brazil.

It also assuaged concerns about the fate of Petrobras, now considered the world’s most indebted company, and how it would tackle a wall of short-term maturities as funding sources narrowed in the wake of a widening corruption investigation.

“Many worried that Petrobras would do a secured deal or potentially a coercive exchange offer,” said Jason Trujillo, a senior analyst at Invesco.

“It (the primary bond) was market friendly. It is a positive sign that they are not doing anything damaging for foreign investors.”

Petrobras paid up to get the deal done. At a 9% yield on the 10-year, the new deal (rated B3/B+/BB) topped the 8.45% the company paid on its first ever century bond in June 2015, which at the time was rated Ba2/BBB-/BBB-.

Final yields also looked juicy against the Brazilian sovereign and other Latin American oil names. The 10-year, for example, came 300bp wide to Brazil’s 2026s spotted at 5.5%.

Other state-owned oil companies like Colombia’s Ecopetrol and Mexico’s Pemex trade with a tighter 200bp differential to their sovereign curves. “(Petrobras) is the cheapest quasi sovereign out there,” one investor said.

The company is using proceeds from the sale to finance an up to US$6bn debt tender to take out short-term bonds.

This liability management trade combined with funding from asset sales and Chinese loans should help give the company some much-needed breathing space.

“All this suggest to me that they won’t have a liquidity problem,” said Sarah Leshner Carvalho, a director of research at Barclays. “It will alleviate short-term funding pressures.”


The new bonds however have not performed in secondary trading and that is raising doubts about the impact Petrobras’ success in the primary market would have on the prospects for more supply from corporate Brazil.

The new 8.75% 2026s tumbled to around 94.25 on Thursday after pricing on Tuesday at 98.374 to yield 9%, according to Trace. The new 8.375% 2021 fared better but also fell to the mid 97s after pricing at 99.002 to yield 8.625%.

Investors were heard selling the 10-year bonds after receiving larger-than-expected allocations on a security that was seen coming far too tight to the five-year tranche.

Final pricing put the spread differential between Petrobras five and 10-year bonds at just 37.5bp, even less than the 46bp between yields on the five and 10-year US Treasuries on Wednesday.

“In general investors are fuming about the new Petrobras bonds,” said Jorge Piedrahita, CEO of broker Torino Capital. “They more than doubled the size...(that) was a big mistake.”


Miner Vale, petrochemical concern Braskem, steel producer Gerdau, as well as beef names Marfrig, Minerva and JBS are all mentioned as potential candidates for issuance in coming weeks.

All these companies could aim to refinance short-term debt in what could be a narrow window ahead of any political upsets at home or further rate fears in the US.

But some bankers were not sure all of them could end up braving markets after the slump in Petrobras bonds.

“This (the poor Petrobras secondary performance) will be at the front of investors’ minds as well as our own syndicate desk,” said a banker with a mandate for a Brazilian corporate.

Some are hopeful the new Petrobras bonds will soon stabilize once dissatisfied investors are flushed out and new accounts renew bets on a credit making progress in addressing its lopsided capital structure.

“Once the tender offer is completed (secondary prices) will look better,” said Leshner. “We maintain our overweight (on Petrobras).” (Reporting Paul Kilby; Editing by Shankar Ramakrishnan)