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Petbra bonds recover but CEO sacking raises Brazil doubts

Petrobras, 575, LatAm, oil, quasi sovereign, Brazil
By Oliver West
25 Feb 2021

Spreads on Petrobras’s bonds recovered most of their lost ground this week after a sharp sell-off followed Brazilian president Jair Bolsonaro sacking the company’s chief executive on Monday. But while strong quarterly results released on Wednesday were a reminder of the state-owned oil and gas giant’s fundamental strength, Bolsonaro’s actions have led to questions around policy decisions in an economy with major fiscal issues.

Petrobras’s Ba2/BB-/BB- rated bonds slumped by up to seven points on Monday, after Bolsonaro nominated retired general and former defence minister Joaquim Silva e Luna as its new CEO. One analyst decried “corporate statism” as others saw the decision as a warning about the direction of Brazil’s fiscal policy.

That day alone, the spread on Petrobras’s 5.6% January 2031s widened from 280bp over US Treasuries to around 344bp and the company’s share price fell by over 20%, while other Brazilian assets — including the Brazilian real — were also hit.

Yet by Thursday morning, the spread on the 2031s was below 300bp and the real had recouped around 80% of Monday’s losses — before selling off again on Thursday, amid a sharp sell-off in US Treasury bonds.

“It’s been a shaky week and markets are pretty dislocated after what was a clumsy move by the president, but there are four or five Brazilian companies preparing deal announcements and this won’t have changed that,” said a DCM banker in São Paulo on Thursday morning. “For a few Brazilian issuers it might add a few basis points to funding costs but, fortunately, they are mostly very pragmatic.

“Fundamentally, not much has changed. EM investors know you get situations like this.”

Brazil’s Ministry of Mines and Energy sent Petrobras a letter after market close on Friday, February 19, requesting that Silva e Luna — who has no experience in the oil and gas industry — replace Roberto Castello Branco as its CEO.

This followed Bolsonaro criticising Castello Branco for his attitude towards industrial action by truckers that followed hikes in fuel price in recent weeks.

The former CEO had said the truckers’ strikes were “not Petrobras’ problem”, sparking the president’s ire.

“Those truckers represent Bolsonaro’s base, and it is best not to mess with the base,” said David Herzberg, managing director in EM corporate research at Stifel Nicolaus & Co. 

One LatAm DCM head in New York said Castello Branco’s comments had been “a little tone deaf” but that “in the grand scheme of things, Monday’s market moves were clearly an overreaction”.

“I’m feeling a lot better on Brazil today than I was on Monday, that’s for sure,” said the DCM head. “But ultimately, Petrobras has de-levered on an almost unimaginable scale and remains a very strong company.

“If Petrobras really wanted to, they could issue next week.”

Indeed, on Wednesday Petrobras announced that it had reduced net debt by a further $3bn in the fourth quarter to $63bn — down from $96bn in 2018.

“Castello Branco has been a fantastic manager and this week’s results were nothing short of extraordinary,” Gustavo Medeiros, deputy head of research at Ashmore, told GlobalCapital. “If the company is allowed to keep on doing its job, it’s going to be a cash machine, but the big question mark is whether or not the new CEO will manage the company with the state at arm’s length.

“If the import parity pricing policy [established in 2016] remains in place, some of the negativity is overdone.”

Broader implications 

Petrobras has limited funding needs, so in recent years its primary market activity has been limited to refinancing existing bonds.

But Brazil is causing investors concern. The government implemented one of the largest fiscal support packages in the emerging markets last year, leaving it with a budget deficit of nearly 15% of GDP and a debt ratio exceeding 90% of GDP.

Bondholders are keen to see an effort towards fiscal consolidation ahead of next year’s presidential elections.

“What is clear is that this decision, in the wake of recently announced gas and diesel price hikes, reeks of corporate statism and/or economic populism,” said Herzberg.

Capital Economics’ chief EM economist, William Jackson, argued that the decision to sack Castello Branco “points to greater government intervention in the economy and could be a prelude to a looser fiscal stance too”.

Another Brazilian DCM banker said it was “a fair assumption that Brazilian risk premia would remain higher” given these implications.

Moody’s said that the Petrobras episode “signals a shift toward more interventionist government policies, raising investor concerns and dampening the economy’s medium-term growth prospects”, and added that the change in leadership at Petrobras may also “weaken the prospects for privatisation of state-owned entities, which had been one of the government’s stated policy objectives and a means of generating one-off revenue inflows”.

However, later in the week the government reiterated its intentions to privatise Eletrobras, the state utility. The São Paulo-based banker said this might be a sign that Bolsonaro realised the gravity of his mistake with Petrobras.

“I think the government is showing that they’re still keen on the liberal agenda,” said Medeiros. “It is bad for Bolsonaro politically to be compared to [former left-wing president] Dilma Rousseff. 

“The economic team has a very ambitious proposal for the budgetary framework. If the government had not sent these positive signals, the currency would have sold off a lot more.”

By Oliver West
25 Feb 2021