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Capital Markets

Petrobras walks the debt/capital tightrope

When Brazil’s national oil and gas champion raised $70 billion from a capital increase in 2010, it was trumpeted as a once-in-a-decade event. But as Petrobras nears its self-imposed leverage thresholds, its capital position looks compromised. A sharp cut to its rating or a return to the equity markets looks likely. So why is Brazil’s banking community so scared to discuss it?

Picture the scene: facing a deteriorating balance sheet and needing to fund a huge capital expenditure programme, Petrobras’s CFO, Almir Barbassa, believes that an equity transaction is the only strategy available to lower the company’s leverage and retain its investment-grade rating. Barbassa is unsure of the best recapitalization structure to employ and, with a presidential election in the following year, there are obvious political issues facing the quasi-sovereign.

Barbassa tells Euromoney that in November more than 30 banks beat a path to the oil company’s Rio headquarters to present their ideas and views on market appetite. All the bankers agree that the company needs fresh equity: Petrobras’s business plan envisages negative cashflow for the next couple of years and the debt-to-equity ratio is approaching 35% – a key threshold used by the company. One banker who visited Petrobras summarizes the situation: "The company is highly leveraged with debt now as it is and if it put more debt on the balance sheet would it be downgraded in terms of its credit rating?

That was in 2009. And the next year the company pulled off a record $70 billion capital increase, pricing at a 2% discount to the last trade, tighter than most comparable deals (although there are few enough of them at this size).

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