Structured Bonds Lifted by $269 Billion Oil Plan: Brazil Credit

Brazil’s planned 461 billion reais ($271 billion) of investment in its oil and gas industry is spurring interest in structured-bond sales as companies tap investor demand for debt tied to the nation’s crude reserves.

Odebrecht Oleo e Gas, the oil services company that operates two ships for state-owned Petroleo Brasileiro SA, sold $1.5 billion of bonds whose principal and interest are tied to revenue from two deepwater drillships expected to begin operating next year. The 6.35 percent interest rate on the notes, the first benchmark offering of project bonds, is “competitive” with bank loans, Marco Campos Rabello, director of structured finance at the Salvador, Brazil-based oil and gas business, said in an interview.

“I’m very confident that there are going to be follow-on deals early next year,” Dan Vallimarescu, managing director and head of Americas debt capital markets at Banco Santander SA in New York, said in an interview. “Every single banker worth his mettle is pitching this project to every single client.”

More Brazilian equipment manufacturers may turn to the bond market to help finance construction, attracted by cheaper interest rates and buoyed by regulations that require Petrobras to make purchases from local suppliers. Brazil, site of the largest crude discovery in the western hemisphere since Mexico’s Cantarell in 1976, needs drill ships, platforms and pipelines to tap as much as 100 billion barrels of oil offshore.

Odebrecht, with contracts to provide five deepwater drillships to Petrobras, used the project bonds to refinance a $1.5 billion bank loan obtained in 2008. The coupon is lower than what Odebrecht paid on the original loan, Rabello said.

‘Taken Note’

“Other issuers have taken note and would consider similar types of issues,” said Alexei Remizov, head of Brazil debt capital markets at HSBC, the second-biggest underwriter of international Brazilian debt this year after JPMorgan Chase & Co., according to data compiled by Bloomberg.

Petrobras, based in Rio de Janeiro, raised about $70 billion in September in the world’s biggest share sale to help fund its $224 billion, five-year investment plan, the oil industry’s largest. The company has leased 20 foreign drilling rigs to begin operation in the next two years as it taps fields such as Libra, which may contain as many as 15 billion barrels.

Odebrecht $1.5 billion offering of 10-year bonds on Nov. 18 priced to yield 6.375 percent, or 370.3 basis points more than similar-maturity Treasuries, according to data compiled by Bloomberg. Benchmark typically means at least $500 million.

The 6.35 percent securities traded at 103 cents on the dollar to yield 5.96 percent at 5:44 p.m. in New York, compared with a 5.8 percent yield on Odebrecht’s 7 percent debt due in 2020 and a 4.7 percent yield on similar-maturity bonds issued by Petrobras, according to Trace, the bond price-reporting system of the Financial Industry Regulatory Authority.

‘Attractive Asset’

“The whole development of the oil and gas sector is what makes this an attractive asset,” said Bernardo Costa, a Latin American structured-finance analyst with Fitch Ratings Inc. in Chicago. “There’s certainly a lot of opportunity for both the bank market and the bond market in the long run.”

Brazil’s recent oil discoveries, the largest in the Americas since 1976, are located in the region known as the pre- salt, which runs 800 kilometers (500 miles) off the coast. The oil deposits are located beneath a layer of salt resting as deep as 3,000 meters (9,800 feet) beneath the ocean surface and another 5,000 meters below the seabed.

Brazil President-elect Rouseff plans to invest 955 billion reais in infrastructure development through 2014, including 461 billion reais for the exploitation of pre-salt oil reserves and sustainable energy development.

Investor Appetite

“It’s clear that there’s an appetite among overseas institutional investors to finance oil and gas in Brazil,” Odebrecht’s Rabello said by telephone. “The advantage of beginning to borrow in the capital markets is that we’ll have two sources of financing, and we can always analyze them based on liquidity and maturity.”

Average yields on Brazilian company bonds relative to benchmarks fell 15 basis points yesterday to 292 basis points, or, or 2.92 percentage point, according to JPMorgan Chase & Co.’s CEMBI bond index.

The extra yield investors demand to hold Brazilian government dollar bonds instead of U.S. securities fell 7 basis point to 176 at 5:47 p.m. New York time, according to JPMorgan.

Yields on Brazil’s interest-rate futures contract due in January 2013 rose seven basis points to 12.36 percent. The real gained 0.5 percent to 1.6963 per dollar.

Default Swaps

The cost of protecting Brazilian debt against non-payment for five years with credit-default swaps dropped eight basis points to 109, according to data compiled by CMA DataVision. 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.

The project bonds allow investors to hold the vessels as collateral in the case of default, according to Fitch.

Investors are willing to assume these risks because they’re seeking alternative ways to invest in Brazil’s infrastructure growth, said Jonathan Prin, a debt analyst with JPMorgan Asset Management in New York, which oversees $10.8 billion of emerging-market fixed-income assets.

“There’s been interest in making the type of investment where your risk is directly correlated to the infrastructure,” rather than the bonds of a development bank or steelmaker, he said in an interview. The credit risk of “blue chip names” like Petrobras and Odebrecht and a structure that contains strong covenants made the bonds “attractive,” he said.

‘Gigantic’

Project bonds will increase financing for Brazil’s infrastructure development by freeing up banks’ balance sheets to make new loans, according to Santander’s Vallimarescu.

“We all know that Brazil has a gigantic infrastructure funding requirement, as does the rest of the region. There’s been a real challenge as to where that money’s going to come from,” said Vallimarescu, who underwrote the Odebrecht bonds with HSBC Holdings Plc, Banco do Brasil SA, and Deutsche Bank AG. “The banks are going to be the ones to go in initially to finance that very early stage construction risk, and then we will recycle that financing into the bond market.”

Record-low interest rates combined with the need to fund infrastructure projects across emerging markets may allow more project bonds to be sold in the future, said Remizov of HSBC.

“The appetite for infrastructure-related bonds has stepped up in recent years,” Remizov said in a telephone interview. “That could induce future transactions of this type.”

To contact the reporters on this story: Gabrielle Coppola in New York at gcoppola@bloomberg.net; Felipe Frisch in Sao Paulo at ffrisch1@bloomberg.net

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

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