Petrobras’ $11 billion deal this week smashed the record for the largest emerging market bond by $2.8 billion. With a book of $43 billion, bankers were left certain it could have pushed the boundaries even further.
EM professionals saw the ease with which the market absorbed the Brazilian oil company’s bond as evidence of the maturity of the asset class.
"A couple of years ago there were a couple of super big deals in the market like Qatar. Everyone was blown away when they happened," said one EM syndicate banker. "The difference now is it’s not that shocking EM can do this."
A New York banker working on the deal described Petrobras’s issue as a validation of the depth of the market, arguing that it showed that emerging market corporates, not just sovereigns, could now compete with other large international borrowers.
"All the blue-chip names in the investor community were there; the book was of an incredibly high quality," he said. "The deal is a lift for Brazil and the emerging market corporate space in general. The fact it is trading up proves that the market can actually absorb size without making the rest of the market collapse."
Petrobras’s six-tranche bond goes straight in at number nine in the list of the largest non-financial corporate bonds of all time, according to Dealogic.
Several bankers working on the deal were sure the borrower could have done more — perhaps even getting close to Apple’s recent $17 billion transaction, which was the largest ever corporate bond — had it not been restricted by board approval.
The demand for Petrobras was particularly notable given that the company is hardly at its strongest at the moment. Moody’s said in January that Petrobras faced "a difficult balancing act" to keep its capital spending programme on track while limiting leverage increases.
The latest borrowing is part of a $236.7 billion 2013-2017 investment plan that Petrobras hopes will increase production from 2 million barrels per day in 2012 to 4.2 million by 2020. But the near-term production outlook is flat, free cash flow is expected to be negative until 2015 and numbers are falling, with first quarter net income down 26% year on year. DIFFERENCE IN YIELDS
Comments that Petrobras (A3/BBB/BBB) had to pay up for its deal – Pemex pays less for its debt despite being lower-rated – appeared to be drowned out by the sheer size of this issue.
Mexican state oil company Pemex (Baa1/BBB) offered a yield of 3.533% on its $2 billion 10-year issue in March, versus the 4.522% Petrobras paid for its 10-year tranche.
"The difference is Pemex didn’t do an $11 billion trade, nor does it have the overhang of a significant financing plan for the next five years that Petrobras does," said one banker on the Petrobras deal. "The financing needs effectively keep a floor on Petrobras’s spreads: they will not come screaming into really tight levels when the market knows the company will come with trades of this sort of size."
That said, the 5 basis points new issue premium calculated by bookrunners seemed optimistic to some.
One banker away from the deal said that the pre-deal levels he had seen would put the concession around 10 basis points, while another head of LatAm syndicate said that even that did not reflect what a borrower really needs to pay for such a large trade.
"This was an extremely well-executed deal and is performing well," said the banker. "But I don’t think you can look at it and claim the new issue premium was only 10 basis points. Petrobras has been trading wider than historically for months as investors anticipated the new deal. Taking last Friday’s prices to work out the NI premium is not really fair."
Completion of the deal appeared to provide some relief to company’s outstanding bonds.
Bankers saw bids on Petrobras paper even on the day of the issue. The new issues have all traded tighter in the aftermarket.
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