March 11, 2014 / 8:51 PM / 4 years ago

Petrobras forced to pay up in new bond trade

NEW YORK, March 11 (IFR) - Petrobras was certainly impressive in building a USD23bn order book for its USD8.5bn six-part bond on Monday, but weaker demand than in years past - not to mention higher concessions - underscored the challenges the Brazilian oil name faces as it tries to reverse its reputation as one of the world’s most indebted companies.

While demand was strong enough to meet an initial target size of USD6bn, according to one banker, the company is paying considerably more to access the liquid dollar market now than it had to last year, when it amassed a USD42.3bn order book for a USD11bn trade - then an EM record.

While it came with new issue premiums in the 3bp-10bp range in that trade, Petrobras ran into a less enthusiastic buyside this time round that wanted final concessions of 20bp-25bp.

If the company can win its high-stakes bet to strike it rich in Brazil’s pre-salt offshore oil fields, and reduce net leverage that hit 3.2 times earnings last year, it may never have to pay such premiums again.

But skepticism abounds - especially as Petrobras struggles to meet leverage targets. Fourth-quarter numbers showed that higher production levels and better Ebitda were still not enough to create positive free cash flows.

“The only exit for Petrobras is to deliver what they have been saying, which is to have positive cash flows starting next year,” said the banker.

“Then the amount of debt can be reduced, and they can start managing their curve. It is hard to see them issuing USD15bn to USD20bn a year. They are coming to an end of an era.”


The attractive concessions were still too good to turn down though, especially as the company’s secondary levels were already under pressure before the new deal was announced.

The company’s stock price has also been hammered, hitting its lowest level in a year this week at USD10.5.

“They clearly paid over the curve that was already beat up,” said a rival banker.

That cheapness helped draw a crowd of some 1,500 accounts, including crossover accounts seeking a pick-up to similarly rated oil names in the US. Meanwhile EM accounts, which in recent years stayed clear of a name they viewed as far too tight, also returned for a nibble, according to bankers.

Indeed, the multi-billion book showed that a sufficient number of investors believe in the turnaround story of Petrobras, not to mention the government’s implied support for a company that is still essentially state-controlled.

“They have invested so much money and if they are not successful in finding enough oil it will be a big problem for the company and for the country,” said a trader.

“ the 2024 is being bid above 6%. For a company with a credit rating of Petrobras, that is too much. This is cheap. I think we will see another year or so with Petrobras issuing at these levels - and after they start producing, things will be different.”

The company is rated Baa1 by Moody’s and BBB by both S&P and Fitch.


Many analysts agree. Barclays noted that Petrobras spreads are near all-time wides versus the sovereign and other triple B corporates, not to mention those from developed markets.

“Petrobras has consistently outperformed in the months following new USD issuance, and we expect this trend to continue,” the shop’s analysts wrote.

The company’s new transaction saw active trading Tuesday, particularly the 10-year and 30-year, which tightened as much as 10-15bp on the break to be quoted at 354bp-351bp and 332bp-335bp this morning.

That suggests the company paid over the odds, but given the recent bout of volatility it’s hard to blame the banks leading the deal - BOCHK, BB Securities, Bradesco BBI, Citigroup, HSBC and JP Morgan - for playing it safe.

Banca IMI SpA and Scotiabank were co-managers.

The bigger concessions of 30-40bp they started with certainly helped build momentum, and ultimately ensured that the company raised the USD5bn it needed to reach its target in the public capital markets this year.

Petrobras had already given itself some breathing space by raising about USD5bn-equivalent in the euro and sterling markets in January, and getting USD8.5bn done was perhaps a bonus.

Initial price thoughts were set at Treasuries plus 260bp on a fixed-rate three-year tranche, Libor plus 246bp on a three-year floater, Treasuries plus 340bp on a six-year fixed-rate bond, Libor plus 298bp on a six-year floater, Treasuries plus 360bp on a 10-year fixed rate bond and Treasuries plus 370bp on a 30-year.

In the end, the company priced a USD1.6bn 3.25% three-year fixed-rate at 99.957 to yield 3.265%, or Treasuries plus 250bp, a USD1.4bn three-year floater at par to yield three-month Libor plus 236bp, a USD1.5bn 4.875% six-year at 99.743 to yield 4.925%, or plus 330bp, a USD500m six-year floater at par to yield Libor plus 288bp, a USD2.5bn 6.25% 10-year at 99.772 to yield 6.281%, or Treasuries plus 350bp, and a USD1bn 7.25% 30-year at 99.166 to yield 7.319%, or 360bp over.

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