Petrobras Avoiding Bond Market as Selloff Deepens: Brazil Credit

Petroleo Brasileiro SA, which sold a combined $13 billion of bonds in the first quarters of 2011 and 2012, is holding off on issuing new debt as borrowing costs rise to the highest in two years versus investment-grade peers.

Declining earnings at the state-controlled company spurred by government-imposed limits on fuel-price increases and waning offshore oil output have helped push yields on its $5.25 billion of bonds due 2021 up 0.55 percentage point this year to 4.16 percent. The jump is triple the increase for emerging-market credits rated BBB- or better, which yield an average 4.18 percent, according to data from JPMorgan Chase & Co.

The bond rout is prompting the oil producer to delay plans to raise about $12 billion in debt this year, according to Vinicius Pasquarelli, an emerging-market debt trader at Standard Credit Group LLC. Petrobras, which is developing the biggest crude discoveries this century beneath the Atlantic Ocean, faces rising borrowing costs as leverage climbs to the highest in at least a decade and concern mounts that government interference is damping profits.

“The international market is starting to see a sovereign risk in the company’s management, so the company isn’t comfortable in issuing as much and as often,” Pasquarelli said in a telephone interview from New York. “Petrobras is going through a rough time in strategic planning.”

Issuance Plunge

Petrobras’s press office in Rio de Janeiro declined to comment on plans for foreign bond sales in an e-mailed response to questions.

The oil producer joined Brazilian issuers from Vale SA to Odebrecht SA in choosing to refrain from selling bonds abroad over the past three months. Offerings were tempered in part as unprecedented fundraising in 2012 damped financing needs.

Brazilian issuance overseas plunged 72 percent from a year earlier to $6.9 billion in the first quarter, according to data compiled by Bloomberg. Brazilian companies issued a record $47.4 billion of bonds last year, led by Petrobras’s $10.3 billion of notes denominated in dollars, euros and pounds.

“You had a whole bunch of high-grade, non-financial companies that haven’t come to market this year because they got their issuance out of the way,” Aziz Sunderji, an emerging-market strategist at Barclays Plc, said in a telephone interview from New York. “They can afford to be opportunistic and tap the market when the conditions are just right.”

Fuel Imports

Rising fuel-import costs led Petrobras’s adjusted earnings before interest, taxes, depreciation and amortization to fall 14 percent last year to 53.2 billion reais ($26.3 billion). The company pays more for gasoline and diesel bought abroad than it charges distributors because Brazil’s government, which controls the company’s board, fixes prices to limit inflation.

Annual production slid 1 percent to 2.6 million barrels a day of oil and natural gas. Net debt to earnings before interest, taxes, depreciation and amortization climbed to 2.77 times in the fourth quarter, the highest in data compiled by Bloomberg going back to 2002, from 1.57 times a year earlier.

Petrobras plans to borrow $61.3 billion to finance $237 billion of investments and service its debt in the five years through 2017, the company said in its most recent business plan. The producer is increasing production at fields trapped under a layer of salt miles below the Atlantic seabed in an effort to more than double output by 2020.

Yield Spread

The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries rose one basis point, or 0.01 percentage point, to 191 basis points at 12:39 p.m. in New York, according to JPMorgan data.

The cost of protecting Brazilian bonds against default for five years increased two basis points to 139 basis points. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements.

The real strengthened 0.2 percent to 2.0179 per dollar. Yields on interest-rate futures contracts due in January 2014 climbed one basis point to 7.78 percent.

Petrobras’s decision not to sell bonds in the first quarter reflects adequate cash on hand as well as the company’s confidence that it will always have access to international capital markets should the need arise, according to Carlos Legaspy, who manages about $350 million of emerging-market debt as president of Insight Securities Inc.

‘No Hurry’

“They covered all their funding needs, trust that the market will be there when they need it, and they’re in no hurry,” Legaspy said in a telephone interview from San Diego.

Announcing a plan to increase capital expenditures by 16 percent this year even as profit tumbles, Petrobras Chief Executive Officer Maria das Gracas Foster reminded investors Feb. 5 of the company’s role in driving the economy and creating jobs.

“The company’s cash flow has to match up with its strategic planning, which is going through a rough time due to its understanding with the government,” Pasquarelli said. “The environment is difficult now.”

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