Petrobras Yields Climb as Share Sale Not Enough: Brazil Credit

Petroleo Brasileiro SA’s borrowing costs are surging to a two-month high on concern the state-owned oil company will tap the bond market for financing even after it completes a stock sale of up to 134 billion reais ($78 billion).

Petrobras’s 7.875 percent bonds due in 2019 yield 4.65 percent, or 100 basis points more than Brazilian government bonds that mature the same year, according to data compiled by Bloomberg. The gap swelled from 57 basis points on Aug. 2.

The company’s debt is lagging behind similar-rated bonds sold by OAO Gazprom, the Moscow-based natural gas exporter. Yields on Petrobras’s 2019 bonds fell 99 basis points this year, compared with a decline of 136 on Gazprom’s similar-maturity notes. Petrobras, which is issuing $42.5 billion of stock to the government in return for the rights to develop 5 billion barrels of oil reserves, will receive about $30 billion in cash from the offering, making a return to the bond market likely, according to Royal Bank of Canada.

“The company is still going to have to turn to the debt market for their huge financing needs,” said Eduardo Suarez, an emerging-markets strategist at RBC in Toronto. “The oil they will develop isn’t going to turn into cash for quite some time.”

The yield on Petrobras’s $2.75 billion of 7.875 percent notes climbed 31 basis points, or 0.31 percentage point, since Aug. 19 to 4.65 percent yesterday, Bloomberg data shows. The government’s 8.875 percent notes yielded 3.65 percent, up 6 basis points during the same period. Petrobras is rated Baa1 by Moody’s Investors Service, two levels above the government.

Debt ‘Limits’

Petrobras, which lost 26 percent of its market value this year, posted the second-smallest profit in the second quarter among the world’s 10 largest oil producers. It surpassed London- based BP Plc., whose earnings were hurt by the Gulf of Mexico oil spill.

Chief Executive Officer Jose Sergio Gabrielli said in an April 30 interview in Sao Paulo that the company doesn’t plan to sell bonds this year because it’s reaching the “upper limits” of debt ratios before putting credit ratings at risk.

Petrobras, based in Rio de Janeiro, will seek to raise $96 billion in debt and equity over the next five years to finance its investment plan, said an official who declined to be identified in accordance with company policy. The $224 billion plan is the biggest in the oil industry.

Tupi

“They will have to go back to the debt market,” said Esther Chan, who helps manage $5 billion of emerging-market assets at Aberdeen Asset Management Plc in London. “Investors aren’t very keen.” Petrobras will have to raise $114 billion in debt over the next five years, Chan estimates.

Petrobras is seeking to finance the development of fields such as Tupi, the largest discovery in the Americas in three decades.

The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries widened 10 basis point to 211, according to JPMorgan Chase & Co.

The cost of protecting Brazilian bonds against default for five years fell less than one basis point to 118, according to CMA DataVision prices. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements. Five-year swaps on Petrobras debt climbed to 158 basis points from 123 at the start of 2010.

The yield on Brazil’s interest-rate futures contract due in January, the most active in Sao Paulo trading, was unchanged at 10.67 percent.

Dollar Purchases

The real gained 1.3 percent to 1.7108 per dollar by 5:35 p.m. in New York. It’s up 34 percent against the dollar since the beginning of last year, the second-best performer among the most-traded currencies tracked by Bloomberg.

The government authorized its sovereign wealth fund to start purchasing foreign currencies such as the dollar as part of an effort to slow the real’s rally, the Finance Ministry said in a statement yesterday.

Petrobras said Sept. 17 it boosted the value of its share sale to as much as 134 billion reais from about 129 billion reais because of higher demand. The company plans to sell 1.59 billion new preferred shares and 2.17 billion new voting shares in its main offer on Sept. 29.

“There’s going to be enough interest for Petrobras’s offering, so it will be able to avoid going to the debt market,” said Christopher Garman, the Eurasia Group’s director for Latin America in Washington D.C. “They’re going to buy themselves some time.”

‘Ideal’

The company’s debt as a percentage of equity climbed to 34 percent in the second quarter from 32 percent in the previous quarter and 28 percent a year earlier, Chief Financial Officer Almir Barbassa told reporters on Aug. 13. A ratio of 25 percent to 35 percent is “ideal,” he said.

Standard & Poor’s cut Petrobras one level to BBB-, the lowest investment grade, in June 2009 on concern the company’s investment plan was too big.

Milena Zaniboni, an analyst at S&P, didn’t immediately return calls and messages for comment.

Petrobras’s bonds yields are also rising on concern the share sale will lead to more government involvement in the company. The Brazilian government owns a 32 percent stake in Petrobras and controls the company through 55.6 percent of voting shares. The sale will probably lead to an increase in the government’s stake, the company said in a Sept. 3 prospectus.

“The mechanics of the transaction have a lot of people uncomfortable because it just brings to the surface a likely increase in the political component to the management of Petrobras,” said Duncan Littlejohn, who helps manage $1.6 billion in global private equity funds at Paul Capital in Sao Paulo. “It has taken a different dimension because the company is going to get bigger after this offering.”

To contact the reporter on this story: Tal Barak Harif in New York at tbarak@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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