Brazil: Petrobras will be shut out of bond markets until 2016
Needs credibility before returning; wants to avoid punitive pricing.
Instead, the oil company’s strategy is to go beyond the minimum requirement of published audited accounts and improve its financial position and credibility before returning to the international markets.
“Petrobras has said to most of their relationship banks that they will have no news for them in 2015,” said the banker, on condition of anonymity. “It needs to get its house in order. Once you price a deal at 6% you are not going back to 3% the next day.”
The banker’s comments show that Petrobras is sensitive about establishing new, high benchmarks that will increase the company’s financing costs for years to come. To avoid punitive pricing the company will have to pare back its capital needs, sell-off some businesses and potentially rely on some interim state financing to present a turnaround narrative to international investors in 2016.
“A lot of banks are helping Petrobras to understand its portfolio of assets and to develop a strategy about which should be retained, which can be sold and which aren’t profitable,” the banker says. “Management will be able to make Petrobras much more efficient by 2016. But you can’t tell investors this story yet – you need to make things happen first, you need a seven-month history of making things happen and having some results and then you can go back to the market, when the price of Petrobras equity and bonds is going up.”
While Petrobras is busy trying to publish audited accounts and planning its financing strategy for the rest of 2015, the fallout for the rest of the economy and contagion to the Brazilian financial markets continues.
Bank of America Merrill Lynch estimates that Petrobras will have a direct, negative impact on Brazil’s GDP growth of at least -0.86 percentage points in 2015.
Meanwhile, there is debate about whether the volatility that Petrobras brought has shut all Brazilian credit out of the market. One New York based banker says: “There is access, but just at a price that reflects some of the noise and if you are not [directly] involved it is hard to take the pill and pay extra unless you really need to. Right now we haven’t seen any companies that have really needed to but that will change.” He also says that the sovereign might decide to help Brazilian issuers by coming to the market to “break the ice” in the first half of the year.
However, the domestic viewpoint is more sceptical. “Investors are already long Brazil so why would they add anything more exposure to their portfolio when there is all this uncertainty about the country?” suggests one São Paulo-based DCM banker. “The premium a company would have to pay would be prohibitive.”
Would a sovereign issue help? “In the past the sovereign would have come to market and then others would come but I don’t see any corporates waiting now. Also, Brazil would price at a level that reflects all the confusion in the markets and questions about its investment grade rating and I am sure it doesn’t want to set a high benchmark by going any time soon.”
And Petrobras could face more immediate problems. While investors and banks have, to date, been patient with Petrobras’ accounting issues, there is the potential for an aggressive strategy from an international investor or hedge fund.
“The bonds are trading between 85 and 90 [cents to the dollar] so someone could buy today and then trigger a clause governing this stand-off in an outstanding Petrobras bond,” says the banker. “The company might then have to settle with these investors quickly – at par – just to resolve the issue and that’s a quick 15 point profit.”
The banker concedes that the bonds are “very large” and in this situation the third party “would need to be a very big investor – or a group of investors” but says it is an example of the dangerous exposures facing the company until it can publish audited accounts.