Brazilian Markets Roiled as Moody’s Cuts Petrobras to Junk Grade

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Petrobras Gas Station
Attendants pump gasoline for customers at a Petroleo Brasileiro SA station in Rio de Janeiro. Petrobras was rated as high as A2 at Moody’s between 2005 and 2009, the sixth-highest investment grade. Photographer: Dado Galdieri/Bloomberg

Brazil’s currency fell the most in the world and stocks tumbled after Moody’s Investors Service cut state oil producer Petroleo Brasileiro SA’s credit rating to junk amid a widening corruption probe.

Moody’s on Tuesday cut Petrobras’s rating to Ba2, two levels below investment grade, and said further reductions were possible. Petrobras is the world’s most-indebted publicly traded oil company, with about $52 billion of bonds outstanding. Speculation that Standard & Poor’s and Fitch Ratings might follow with their own downgrades sent the company’s benchmark bonds due in 2021 plunging 1.95 cents to 88.96 cents on the dollar, the biggest decline this month.

Petrobras’s failure to assess the magnitude of losses due to corruption has rendered it unable to produce third-quarter results, causing delays that if prolonged could lead to a bond default, Moody’s said. The downgrade is the latest blow for Brazil, where the Petrobras bid-rigging scandal has ensnared some of the country’s biggest construction companies and the country’s sugar producers have suffered from a collapse in prices.

“Petrobras is Brazil’s most important company, so the downgrade may affect the mood of investors toward the country’s assets in general,” Alexandre Povoa, who helps oversee $100 million at Canepa Asset Management, said by phone from Rio de Janeiro.

S&P and Fitch currently rate Petrobras at the lowest investment-grade levels.

Markets Tumble

The real depreciated 1.4 percent to 2.8691 per U.S. dollar in the worst performance among 31 major currencies tracked by Bloomberg. The Ibovespa stock index fell 0.1 percent to 51,811.02, the biggest drop among major global equity benchmarks. The Brazilian government bond maturing in 2025 fell 1.02 cent to 96.50 cents on the dollar.

Petrobras’s shares tumbled 4.9 percent to 9.38 reais at the close of trade in Sao Paulo.

At its peak in 2009, the company was the world’s fifth-largest company, with a market capitalization of $310 billion. Now, amid the corruption probe, and after years of missing output goals and selling imported gasoline at a discount as part of government policies to tame inflation, Petrobras is worth just $45.1 billion.

“The cut by two notches can be seen as surprising,” Carlos Gribel, the head of fixed income at Andbanc Brokerage LLC, said by telephone from Miami. “The main concern now will be another cut to junk by Fitch or S&P, which could lead the company’s bonds to be sold by many institutional investors.”

Failed Attempt

Petrobras’s executives were informed by Moody’s on Tuesday morning that the company would be lowered to junk after two months of negotiations, according to a report in the newspaper O Estado de S. Paulo. Finance Minister Joaquim Levy made a last-minute attempt to try to reverse the decision, offering a guarantee that the government would support the company if necessary, Estado reported.

Brazilian Institutional Relations Minister Pepe Vargas told reporters in Brasilia today that the country is not afraid of a sovereign downgrade because its fiscal targets are “perfectly reasonable.”

In November, police arrested more than 20 people as part of an investigation into whether company executives demanded bribes from builders in exchange for contracts.

The probe prompted Maria das Gracas Foster to step down as chief executive officer earlier this month after she failed to broker a consensus on the size of the writedowns.

Rio de Janeiro-based Petrobras said in a regulatory filing on Tuesday that it has no bond covenants that would be triggered by a downgrade to junk.

‘Increasing Concern’

The downgrade by Moody’s “reflects increasing concern about corruption investigations and liquidity pressures,” Nymia de Almeida, an analyst at the rating company, said in a statement on Tuesday. The company will be challenged to make a meaningful reduction in its “very high debt burden” over the next several years, she said.

Petrobras bonds were already trading closer to junk than to investment grade. As of this week, yields on the bonds due in 2021 were at 7.73 percent, closer to the average 8 percent yield of companies in the junk-grade Ba category than to the 5.2 percent average for those in the higher Baa bucket.

The scandal has added to the woes of President Dilma Rousseff, who served as chairman of Petrobras between 2003 and 2010, the period during which the alleged payoffs occurred.

“Petrobras’s junk rating should have a disastrous effect not only on its assets but also on Brazil’s economic outlook,” Joao Paulo de Gracia Correa, a trader at Correparti Corretora de Cambio in Curitiba, Brazil, said in an e-mailed research note to clients.

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