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Best Borrower Latin America 2008

Petroleo Brasileiro SA (Petrobras)

Petrobras defied the twin obstacles of plummeting oil prices and sky-high borrowing costs by announcing in February an aggressive $174.4 billion, five-year investment programme.

The Brazilian government-owned oil giant is capitalizing on its full menu of borrowing options: syndicated loans, bilateral creditors, development bank loans, global bonds and relationship-based lending.

Thanks to the company’s privileged ownership status, manageable leverage and strong risk management, such aggressive capital-raising plans in the face of the global storm have hardly perturbed credit analysts. “I think Petrobras is embarking on a good strategy of diversifying their sources of funding, and analysts so far are comfortable with the risks,” says Jose Luis Villanueva, Latin corporate credit analyst at Fitch in New York. “The company has gone from fairly conservative to aggressive over the last year.”

Between 2003 and 2007, Petrobras increased its net debt by only $2 billion. As corporates around the world freeze expansion plans, the oil company is ambitiously bucking the trend. In February, it unveiled a $174.4 billion investment budget for 2009–13. This plan is 55% larger than the preliminary estimate released last year. The company aims to plough $48 billion into exploration and development for newly discovered oilfields with the rest paying for higher costs of existing projects.

The strategic importance of Petrobras has increased markedly as Brazilian growth slows. The company represents a means for the government to ensure that crucial capital investment is not derailed by the credit crash while serving to boost the country’s long-term growth potential.

The firm’s financing needs are estimated at around $18 billion for this year and the same amount in 2010. Petrobras has been bolstered by a $12 billion loan from Brazil’s state development bank BNDES. In addition, the company secured in February a $4.5 billion syndicated loan, courtesy of its faithful lenders with relatively strong balance sheets – HSBC, JP Morgan and Santander – at a competitive 275bp over Libor.

The BBB/BBB/Baa1-rated issuer also dipped its toes into international capital markets, confirming its investor-friendly status by successfully launching a new 10-year benchmark. In February, it issued a $1.5 billion, 10-year global bond with a 7.875% coupon at 98.282 to yield 8.125%, or 518bp over US Treasuries.

High-yield World

Emerging market borrowers now live in a high-yield world and, with this deal, Petrobras has been forced to accept new pricing levels. For example, it reopened the Latin corporate market with a $750 million, 2018 issue in January yielding 5.86%, just 205bp over US Treasuries. But the following month, it postponed the $500 million re-opening of its global 2016s after failing to attract enough investors for its 5bp concession offer at 210bp over US Treasuries, as markets took a turn for the worse.

Nevertheless, the 2019 issue is competitive relative to its peers, say bankers. Lead managers HSBC, JP Morgan and Santander took advantage of the $5.4 billion of orders and the issuer’s conservative decision not to upsize the deal to price the 2019 benchmark with a fair but tight yield. Just the week before, Pemex, Petrobras’ Mexican quasi-sovereign counterpart, issued $2 billion in 2019 notes to yield 8.25% around a 200bp pick-up relative to its Mexican sovereign benchmark. By contrast, Petrobras secured around 145bp pick-up to the Brazilian sovereign for the SEC-registered global 2019s. As a publicly listed company, Petrobras attracts equity-focused buyers, helping to broaden its pool of buyers.

Investors in Petrobras’ bonds are confident with the company’s self-imposed leverage limit of 35% of capital. “These guys are very well run compared to Mexican government-owned Pemex, so we do have a lot of confidence in the company’s performance,” says one California-based fund manager, who bought the 2019 paper.

“The private-sector mentality of the management and its implicit government support, with its privileged funding from the likes of BNDES, are strongly supportive factors for its creditworthiness,” says Villanueva.

But some analysts have concerns. “With oil prices low and global liquidity tight, I question whether it is a good time for Petrobras to become levered,” says Marcus Guerra, equity analyst at Credit Suisse in Sao Paulo.

Villanueva observes that with a break-even oil price of $40 a barrel, Petrobras will still be profitable, and internally generated funds could go some way in driving its capital expansion. In addition, he argues the company has the flexibility to re-adjust capital spending, external borrowing and subsequent leverage ratios in response to changing oil market conditions.

The company is also close to finalizing a $10 billion line of credit from China Development Bank, as a pre-payment financing for future oil supplies. This fulfils both China’s and Brazil’s strategy of deploying accumulated financial firepower to drive long-term objectives against the backdrop of weakened commodity prices.

In the short term, Petrobras’ credit profile may weaken as it tackles the risky business of taking on new debt and exploring new oilfields. But the diversity of its borrowing sources, state support and good risk management bode well for the future.

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