Petrobras Cut to Junk by S&P Following Brazil Downgrade

  • Rating company also set negative outlook for oil producer
  • Decision seen leading to selloff by institutional investors

Petroleo Brasileiro SA was downgraded to junk by Standard & Poor’s, which signaled the possibility of more cuts to come.

The world’s most-indebted oil producer’s rating was cut two levels to BB, a day after S&P reduced Brazil’s sovereign debt to speculative grade for the first time in seven years. The outlook for the company’s rating is negative.

S&P joins Moody’s Investors Service in moving Petrobras to junk amid a wide-ranging investigation into alleged kickback schemes at the company, which has ensnared some of the company’s biggest businesses and prominent politicians. Because of internal rules, some institutional investors such as pension funds can’t hold securities rated junk by at least two agencies, which could lead to a selloff in Petrobras’s $56.5 billion of dollar-denominated debt.

“It will certainly be harder and more expensive for the company to raise debt," said David Tawil, who manages $80 million in assets as co-founder of hedge fund Maglan Capital in New York. "Some holders such as banks and insurance companies may be forced to sell because of strict guidelines."

Yields on Petrobras’s $2.5 billion of bonds due 2024, a benchmark for the company, have soared 3.93 percentage points in the past 12 months to 9.2 percent, the highest since the notes were issued in March 2014.

The increasing borrowing costs come as Petrobras plans to invest $108.6 billion on exploration and production through 2019, focusing on the so-called pre-salt region that holds Brazil’s biggest oil discoveries. This year, the company slashed its production growth estimates by more than a third.

Fitch Ratings, which classifies Petrobras at the lowest investment grade with a negative outlook, has said the company is one of the Brazilian issuers most vulnerable to the effects of a selloff in the local currency. The real has tumbled 31 percent this year, the most among major currencies.

The company’s net debt to earnings before interest, tax, depreciation and amortization -- a measure of indebtedness -- rose to a record 5.1 times in the first quarter, and stood at 4.8 times at the end of June, data compiled by Bloomberg show.

Moody’s cut Petrobras to junk in February because of its failure to release audited financial results. The oil producer published its third- and fourth-quarter earnings in April, following a five-month delay.

The company has blocked more than 30 suppliers from bidding for new work while the investigations into alleged kickbacks continue. It maintains that it’s a victim in the scheme where a handful of rogue executives took bribes from contractors and then shared the proceeds with political parties in the ruling coalition.

Once worth $310 billion at its peak in 2008, a valuation that made it the world’s fifth-largest company, Petrobras is currently valued at $30 billion in the stock market.

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