Bond traders have never been more skeptical of Moody’s Investors Service ratings for Petroleo Brasileiro SA, Brazil’s state-controlled oil producer.
The extra yield investors demand to own the company’s $5.25 billion of bonds due 2021 instead of Brazilian government debt rated one level lower swelled to a record 1.86 percentage points last week. The gap has widened from 1.15 percentage points a year ago, when Moody’s still rated Petrobras, as the oil producer is known, two levels higher than Brazil. Moody’s lowered Petrobras to Baa1 from A3 on Oct. 3 after maintaining at least a two-step advantage to the sovereign since 2001.
Petrobras’s borrowing costs have climbed faster than state oil producers Petroleos Mexicanos and Colombia’s Ecopetrol SA this year as fuel-price subsidies erode profits and debt sales aimed at financing a $237 billion investment plan make the Brazilian company the world’s most-indebted publicly traded oil producer. The yield premium between Petrobras and Brazilian government debt has more than tripled since early 2011, when the oil producer began subsidizing fuel imports as part of President Dilma Rousseff’s effort to curb inflation.
“I don’t think the one-notch rating differential is relevant to the market at all,” Jason Brady, a money manager who helps oversee $89 billion at Thornburg Investment Management Inc., said by telephone from Santa Fe, New Mexico. “It’s sort of odd.”
Petrobras didn’t respond to an e-mailed request for comments on the performance of its bonds. Chief Executive Officer Maria das Gracas Foster said Oct. 7 that the Moody’s downgrade was an alert to take better care of its economic indicators.
“Nobody likes to get a bad grade,” Foster told reporters in Brasilia. “All this will be overcome.”
Yields on sovereign securities last year moved in the opposite direction from what ratings indicated in 53 percent of 32 upgrades, downgrades and changes in credit outlook, according to data compiled by Bloomberg published in December. That’s worse than the longer-term average of 47 percent, based on more than 300 changes since 1974.
Yields on Petrobras’s bonds have soared 1.54 percentage points this year to 5.16 percent as the company sold a record $11 billion of debt in overseas markets, boosting its obligations to a record $112 billion. Its net debt has jumped to 2.96 times earnings before interest, taxes, depreciation and amortization, the highest among producers with more than $50 billion in market value, data compiled by Bloomberg show.
Fuel subsidies contributed to reducing Petrobras’s profits to 21 billion reais ($9.6 billion) in 2012 from 33 billion reais in 2011. Brazil’s government controls Petrobras’s board with a majority of voting shares, and Finance Minister Guido Mantega is the company’s chairman.
Brazil increased its control over the oil industry after it announced in 2007 the discovery of at least 50 billion barrels of oil trapped under a layer of salt two miles below the Atlantic seabed. Former President Luiz Inacio Lula da Silva drafted legislation to make Petrobras the operator of all new projects in the so-called pre-salt region with increased oversight from regulators. Rousseff helped design the energy policies as chief of staff under Lula.
The legislation calls for a new state company, Pre-Sal Petroleo SA, or PPSA, to represent the government with the power to veto decisions at pre-salt projects, including Libra, Brazil’s biggest discovery that will be auctioned under a new profit-sharing model on Oct. 21.
The growing government intervention in Petrobras, the biggest producer in waters deeper than 1,000 feet, is now prompting even Moody’s to reassess its ratings.
The oil producer is at risk of losing its ratings premium over Brazil, according to Thomas Coleman, an analyst at Moody’s. The New York-based company has historically rated Petrobras higher than the sovereign because the combination of government support and foreign-currency revenue would make it less likely to default, he said.
“A lot of the relationships between the government and Petrobras are increasing, there’s more dependence or default correlation between the two entities than there had been in the past,” Coleman said by telephone from New York. “At some point, the ratings could converge, and we’ve got a negative outlook on Petrobras anyway, so there’s some possibility in the future that the two will be rated the same.”
The Finance Ministry declined to comment on the impact fuel price policies have had on Petrobras’s borrowing costs and ratings in an e-mailed reply to questions.
Fabiano Santin, a fixed-income analyst at Kondor Invest in Sao Paulo, said Petrobras bonds will rebound, narrowing the yield premium to Brazil, if the government raises fuel prices enough to reduce losses from importing gasoline and diesel.
Energy Minister Edison Lobao said Oct. 14 he was “confident” the government would raise fuel prices before the end of the year.
“If next week the government says Petrobras can raise fuel prices, the spread will tighten,” Santin said by phone.
Petrobras’s bonds yielded 1.86 percentage points more than Brazilian debt on Oct. 9 before narrowing to 1.62 points yesterday. The average yield premium since January 2011, when the Petrobras notes were issued, has averaged 1.28 percentage points, according to data compiled by Bloomberg.
The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries dropped one basis point, or 0.01 percentage point, to 218 basis points at 3:53 p.m. in New York, according to JPMorgan Chase & Co.
Brazil’s five-year credit-default swaps, contracts protecting holders of the nation’s debt against non-payment, rose four basis points to 150 basis points.
The real gained 0.8 percent to 2.1623 per dollar. Yields on interest-rate futures contracts due in January 2015 climbed four basis points to 10.42 percent.
Even if Petrobras is able to raise fuel prices to take advantage of oil prices above $110 a barrel, it probably won’t be enough to erase the subsidy, according to Su Fei Koo, a money manager at DoubleLine Capital LP.
“We’re not seeing the benefits” of higher oil prices, Koo said in a telephone interview from Los Angeles. “It all points one way -- that leverage is going to go up, which is not good for credit fundamentals.”