Petrobras Unit Debt Proves Too Cheap to Resist: Argentina Credit

Argentina Lowers Voting Age as Fernandez Tries to Regain Footing
Argentina's President Cristina Fernandez de Kirchner. Photographer: Paul J. Richards/AFP/Getty Images

Petrobras Argentina SA’s dollar bonds, beaten up on concern the government would block debt payments, now look irresistible trading at the biggest discount to its Brazilian parent since June.

Yields on the bonds due 2017, after surging 27 basis points last week, or 0.27 percentage point, have dropped 26 basis points this week, part of a rebound in Argentine assets sparked by growing confidence that President Cristina Fernandez de Kirchner won’t force issuers to repay overseas debt in pesos. The rally has narrowed the yield gap with similar-maturity debt from Rio de Janeiro-based Petroleo Brasileiro SA to 146 basis points from 165 basis points last week, when Fernandez refused Chaco province’s request for the dollars it needed to pay local debt.

Petrobras Argentina’s borrowing costs are falling faster than the average for Argentine companies as the oil producer’s debt is backed by its Brazilian parent, giving investors more confidence the notes will be repaid, according to Capital Markets Argentina. Average yields on international government bonds have dropped seven basis points this week to 10.56 percent, JPMorgan Chase & Co. data show.

Petrobras Argentina’s bonds are “guaranteed by Petrobras Brazil and it’s been punished, so that has created an opportunity,” Noelia Lucini, a portfolio manager at Capital Markets, said in a telephone interview from Buenos Aires. “The news in the last two weeks aroused uncertainty.”

Brazil Guarantee

A press official at Buenos Aires-based Petrobras Argentina who asked not to be identified in accordance with company policy declined to comment on the bonds.

Bonds of Brazil’s state-controlled oil company, known as Petrobras, are rated A3 by Moody’s, three steps above investment grade and the same rating as the 2017 bonds issued by its Argentine unit.

The $300 million of notes due in 2017 are supported by a purchase agreement provided by Petrobras, which requires the parent company to pay bondholders in case of a default and “is designed to function in a manner similar to a guarantee,” according to the bonds’ prospectus.

The backing should keep the borrowing costs of Petrobras Argentina, the nation’s fourth-largest oil producer, low, with yields of about 50 basis points more than those of the parent company on average, according to Jim Harper, director of corporate research at BCP Securities LLC.

Currency Restrictions

Moody’s lowered Petrobras Argentina’s outlook to negative on Sept. 28 after doing the same for the Argentine government, citing Fernandez’s “haphazard policies.” A month earlier, the company’s rating had been cut to B1, reflecting the risk of further government intervention in the oil industry following the expropriation of oil-producer YPF SA in April.

Since her re-election a year ago, Fernandez banned dollar purchases for savings, real estate and the repayment of debt issued under local law by provinces and companies in a bid to slow capital flight and preserve foreign reserves.

Argentine corporate debt lost 1.04 percent last week, the biggest weekly loss since June 29, according to JPMorgan’s CEMBI index. The selloff also spread to local and international law government bonds.

An investment surge into emerging-market notes in September on the back of stimulus measures by policy makers in the U.S., Europe and Japan means that some bondholders are less likely to understand the terms of their debt contracts, according to Jack Deino, a portfolio manager at Invesco Inc.

Money managers increased their investments in emerging-market bonds by $1.9 billion in September to $6.5 billion, according to research company EPFR Global.

‘Bite You’

“Half the guys that are buying these deals are not even reading the indentures or the covenants or the prospectuses or anything,” Deino said at Fitch Ratings’ Fifth Annual Emerging Markets Conference in New York on Oct. 16. “That can come back to bite you.”

In addition to Chaco’s $26.7 million of bonds due in 2015 and 2023, other securities subject to the measures include $96.7 million of Tucuman province bonds due in 2015 and 2020 and $41.4 million of debt sold by the province of Formosa due in 2022, according to Buenos Aires-based research company Economia & Regiones SA.

Chaco, a soy bean-producing region in the north of Argentina, will swap its dollar-denominated debt for peso bonds, Governor Jorge Capitanich said in an Oct. 17 interview on CN23 while recommending that other provinces follow his lead.

Provinces Cut

Moody’s lowered the credit ratings for Chaco, Formosa and eight other provinces and municipalities on Oct. 17, citing difficulties in obtaining foreign currency. The ratings company cut the foreign-currency credit ratings to Caa1, seven steps below investment grade, for the provinces of Buenos Aires, Cordoba and Mendoza, as well as the city of Buenos Aires.

Argentina made a $200 million debt payment Oct. 17 on domestic law bonds due 2017, Fernandez said that day. The Argentine government and issuers that sold bonds under international law can still get dollars to repay creditors, according to the central bank.

With the lowest yields among 34 Argentine corporate bonds tracked by Bloomberg, Petrobras Argentina’s bonds aren’t paying investors enough to offset the risk associated with investing in Argentina, according to Mario Rappoport, a managing director at Gleacher & Co.

Lowest Yields

“In Argentina, you have headline risk and you have it constantly,” Rappoport said in a telephone interview from New York. “I understand it’s Petrobras, fully owned, but at this spread, it doesn’t make that much sense to take the risk.”

The gap over Petrobras’s bonds due in 2018 soared to 636 basis points in April, when Fernandez seized a controlling stake in YPF from Madrid-based Repsol SA. That’s a signal that investors should demand an interest rate of at least 225 basis points more than that of the parent company before buying Petrobras Argentina’s bonds, Rappoport said.

The extra yield investors demand to hold Argentine government dollar bonds instead of U.S. Treasuries rose six basis points, or 0.06 percentage point, to 851 basis points at 12:36 p.m. in Buenos Aires, according to JPMorgan’s EMBI Global index.

The cost of protecting Argentine debt against non-payment for five years with credit-default swaps rose eight basis points to 979 basis points, data compiled by Bloomberg show. The swaps pay the buyer face value in exchange for the underlying securities or cash if a government or company fails to comply with debt agreements.

Weaker Peso

Warrants tied to Argentina’s economic growth rose 0.01 cent to 12.64 cents. The peso weakened 0.1 percent to 4.7369 per dollar.

Investors who own Petrobras’s securities should consider switching into Petrobras Argentina’s bonds, according to BCP’s Harper. The Argentine unit’s notes are as safe as those of the parent and offer a higher yield, according to BCP’s Harper.

“You’ve got to emphasize this is Petrobras risk,” he said by telephone from Greenwich, Connecticut. “It’s not Argentina risk. To the extent that that spread has widened, it’s even more compelling to swap from one into the other.”

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