Last Monday (February 11), Brazil’s state owned oil firm set out to sell a $500m tap of its 6.125% 2016 bonds. It was to be the company’s second dollar deal of the year, following the $750m tap of its 2018 bond in January.
With Petrobras’s existing 2016 notes opening at 200bp over Treasuries on Monday morning, bookrunners BNP Paribas and Morgan Stanley approached investors with suggested pricing of 210bp over, giving investors a 10bp concession.
Some accounts were happy with a 10bp-15bp concession and a possible deal started to build, but many other investors balked at the paltry premium and, later the same day, the deal was abandoned.
Predictably, Petrobras blamed poor market conditions for its decision to scrap the transaction but investors and bankers away from the deal insisted that with a more realistic spread of between 220bp-225bp over Treasuries, it could have been nimbly executed.
“This deal was horrifically incompletely run — the reopening was just way too aggressive,” said one debt capital markets head in New York last week. “Once it failed to get traction, there was no momentum.”
Others tried to fathom the rationale behind the modest concession. “The leads probably thought that if you look at where the deal was being priced at 210bp over eight years and you interpolate the swap curve, it was flat to where the 2018s were at that time... there is value here,” said one banker away from the transaction.
But investors weren’t buying it and, with A1/A+/A+ rated multilateral Corporación Andina de Fomento paying a 15bp-20bp concession to secondaries for its $250m tap in January, why would they?
Most US and European banks and companies have, since last August, accepted that to get deals done in volatile conditions, eye-watering new issue premiums are needed. And when executing a tap, a generous new issue concession provides a safety buffer against any possible downdraft in the market. Had no one read the script to Petrobras?
Petrobras is not the first emerging market borrower to storm away from the market in a fit of pique and it probably won’t be the last. It’s a story that, while frustrating, is becoming tiresome for bankers and investors in the emerging markets, where some borrowers have earned a reputation for intransigence on pricing, regardless of market conditions.
In early July 2007, BBB rated PKN Orlen, the Polish oil company, abandoned its seven year euro benchmark debut less than three hours after releasing guidance. It has not ventured back into the market since.
But Petrobras is not just any emerging market borrower. Like Russia’s Gazprom or VTB, it is a marquee name — a blue chip borrower. A successful Petrobras issue would have raised confidence in the Latin American new issue market at a critical time, giving a vital boost to smaller borrowers and investors alike. Borrowers like Petrobras were, bankers, hoped, going to lead the way back into the market to show less experienced issuers how it’s done.
Instead, bankers fear Petrobras’s intransigence will wreak long-term damage on the new issue market. After all, if Petrobras isn’t going to lead the way, who will?
Yet borrowers alone cannot be blamed. Origination bankers must refrain from telling emerging market issuers what they think they want to hear and start telling it like it is.
“You have to wonder what the hell these leads were thinking,” said one origination head in New York. “They are clearly to blame. Regardless of new issue premium, the rally in US Treasuries far outweighs the additional credit spread you have to pay. Why risk messing up a transaction and annoying investors?”
Why indeed.
Petrobras was keen to point out it has other financing options. So too, of course, do most issuers. Emerging market borrowers, fearful of repricing their curves and looking like fools should the market miraculously improve, have been assiduously avoiding pricing new deals.
Of course, most heads of funding at US companies will tell you this view smacks of rose-tinted delusion.
Nonetheless, emerging market borrowers are calling in favours from the banks they are closest to and quietly pricing small, expensive deals privately. But borrowers with large financing needs cannot live on syndicated loans and small private placements alone.
The verdict is unanimous: if you are going to announce a deal, you must go ahead and print it or incur the wrath of investors. And to do a deal, you must be willing to pay up. For now, it might serve these borrowers to go begging cap in hand to their relationship banks. But they can’t avoid the bond market forever, and investors have long memories. Just ask Transneft.