The BBB/BBB/Baa1deal was priced on Wednesday with a 7.875% coupon at 98.282 to yield 8.125%, or 518bp over US Treasuries. Lead managers HSBC, JP Morgan and Santander took advantage of the $5.4bn of orders and the issuers conservative decision not to upsize the deal to price the 2019 benchmark with a fair but tight yield.
On Wednesday morning, the leads sent out soft pricing whispers to investors in the low-to-mid 8s. By 11pm, the deal had sucked in around $4bn of interest and official pricing guidance in the 8.250% area was released. The almost four times oversubscription for the senior unsecured notes helped to cap the yield at 8.125%.
Petrobras has a well-known and liquid borrowing profile and its 2018s were referenced for pricing rather than Brazilian government debt. But its 2018s have tightened on the back of improved Latin credit conditions and positive market response to its investment programme.
Bankers say the new issue concession represents around 35bp-40bp relative to the 2018s that had, nevertheless, widened on news of new debt supply. Bankers away from the transaction say the premium was around 60bp compared to the previous days trading.
Last week, Pemex, Petrobras fellow quasi-sovereign counterpart, issued $2bn in 2019 notes to yield 8.25% with a 15bp to 20bp concession. However, the oil companys existing 2018s were trading at historically wide levels to the sovereign at around 210bp, helping to place a ceiling on the new issue concession. By contrast, Petrobras secured around 145bp pick-up to the Brazilian sovereign for the SEC-registered global 2019s.
The decision to issue in the international capital markets has come as an abrupt about-turn to many in the market after its chief executive, José Sergio Gabrielli, announced last week that borrowing costs were prohibitively high. "Petrobrass risk curve needs to be more realistic than it is today. We need to observe the market conditions and go to the market when they are more favourable," he said.
But over the past week, Petrobras embarked on a roadshow in London, New York, Boston, San Francisco and Los Angeles.
It has secured $12.5bn from BNDES and intends to borrow around $5bn in the international loan market. After this weeks $1.5bn issue, it plans to raise a further $3.5bn to $4.5 in the next two years in the local or international bond market. The Brazilian government led by president Luiz Inacio Lula da Silva owns over 50% of the company's common shares.
A banker on this weeks transaction said: "The company realised that now is as good a time as ever to issue. Even if spreads come down, there could be a sell-off in US Treasuries that will raise the all-in yield costs of new deals. The borrower realised we live in a high-yield world now."
Petrobras reopened the Latin corporate market with a $750m 2018 issue last January yielding 5.86%, 205bp over US Treasuries. But the following month, it postponed its $500m re-opening of its global 2016s after failing to attract enough investors for its 5bp concession offer at 210bp over US Treasuries.
"The borrow has a reputation of trying to squeeze every basis point but its demands were reasonable and it wanted the transaction to be well liked by investors because it will probably issue again in September," said one of the leads. While Pemex last week aimed for a large benchmark, Petrobras opted for tighter pricing.
Rival bankers were complimentary. "Everything about the deal made sense. It was a completely fair transaction," said one debt banker in New York.
In the end, 55% of the notes were sold in the US, 35% Europe, 10% Latin America/Asia and 10% other, including Middle Eastern orders. By investor type, 42% were fund mangers, 14% hedge funds, 12% banks, 7% insurance companies and 3% pension funds. Around 330 investors participated compared with 230 participating accounts for Pemex. As a publicly listed company, Petrobras attracts equity-focused buyers, helping to broaden its pool of investors and the deal traded up in the initial aftermarket. The issuer paid 40bp in fees.
Petrobras acceptance of new pricing levels should jolt other corporate issuers into entering the dollar-denominated international bond market. However, the new issue window may temporarily close since corporates have to release quarterly earnings from February 12 or face a market blackout and Latin firms are notoriously slow at accounting.