Petrobras’ European Foray Heralding Global Shift: Brazil CreditBoris Korby
Petroleo Brasileiro SA, Brazil’s oil producer, is leading a global push to obtain cheaper debt financing in Europe as the Federal Reserve’s move to scale back its stimulus increases borrowing costs in the U.S.
Petrobras sold $5.1 billion of bonds denominated in euros and pounds on Jan. 7, helping to propel emerging-market debt issuance in European currencies to the fastest-ever start to a year, according to data compiled by Bloomberg. Barclays Plc predicts borrowers from developing countries will sell a record amount of debt denominated in the region’s currencies this year.
With the European Central Bank and Bank of England pursuing policies to suppress borrowing costs as the Fed curtails its own debt purchases, it’s now about 0.76 percentage point cheaper for developing-nation companies to sell bonds in euros and convert to dollars than it is to issue in greenbacks directly, data compiled by Bloomberg and Bank of America Corp. show. A year ago, euros were 1.09 percentage points costlier to borrow.
“It’s not a one-off,” Aziz Sunderji, a strategist at Barclays, said in a telephone interview from New York. “The better outlook for risk-free rates in Europe has caused more demand for euro-denominated paper. As long as this relative difference in funding costs exists, companies will continue to take advantage of it.”
Petrobras’s bond sale, the biggest in Europe by a developing-nation company, means Brazilian offerings in the region’s currencies already exceed all previous full-year totals, data compiled by Bloomberg show.
A press official at Rio de Janeiro-based Petrobras declined to comment on the bond sale in an e-mailed response to questions.
The oil producer’s offering was followed this week by sales in euros from Poland and Slovakia, while Israel and Brazilian state development bank BNDES are considering raising funds in the currency in the coming weeks, according to people familiar with the plans who asked not to be identified because the information isn’t public.
BNDES’s press office said in a phone interview that a bond sale will depend on market conditions.
Brazil’s real strengthened 1.3 percent today to 2.3603 per dollar as of 2:42 p.m. in New York.
The ECB yesterday strengthened its pledge to keep interest rates low for as long as necessary, leaving its deposit rate at zero and the marginal lending rate at 0.75 percent. England’s Monetary Policy Committee kept its key rate at a record low 0.5 percent yesterday and its bond-purchase program at 375 billion pounds ($617 billion).
The Fed announced last month it’s trimming monthly bond purchases to $75 billion from $85 billion, citing improvement in the labor market.
The cheapest price to swap euros into greenbacks since 2008 is also helping to lure borrowers to Europe.
The cost to exchange the 18-nation common currency into dollars with five-year cross-currency basis swaps dropped to a six-year low of 8.5 basis points below the euro interbank offered rate yesterday, data compiled by Bloomberg show.
The total costs for Petrobras to sell its 750 million euros of 3.75 percent bonds due 2021 and exchange the proceeds for U.S. currency is equivalent to paying 4.88 percent on dollar-denominated securities, according to data compiled by Bloomberg. That’s 0.56 percentage point cheaper than the yield on the company’s $5.25 billion of dollar-denominated bonds with the same maturity.
“That’s a good combination that helps a borrower look at this market in a very close way,” said Roberto D’Avola, the head of Latin America debt capital markets at JPMorgan Chase & Co., which managed the Petrobras sale. “Some of our issuers in Latin America do have exposures to these currencies too, but if they don’t, the combination of low rates and the basis swap makes it appealing to them.”
Omar Zeolla, a corporate credit analyst at Oppenheimer & Co., said the size of the European debt market is smaller than that of the U.S., limiting the extent to which developing-nation issuers can access funding in the region.
There’s 73 billion euros of emerging-market corporate debt denominated in the currency, versus $1.08 trillion in the U.S. bond market, according to data compiled by Bank of America.
“You see only the larger companies, the largest investment-grade issuers go there,” Zeolla said in a telephone interview from New York. “Companies need name recognition to attract European buyers. They’ll recognize Petrobras, BNDES, but they won’t be willing to buy high-yield names.”
Caracas-based multinational Corporacion Andina de Fomento, which provides international financial services to support economic development in Latin America, issued 275 million Swiss francs ($303 million) of securities due 2024 earlier this week.
“There’s definitely the opportunity for good-quality issuers in Latin America to go to the euro market,” JPMorgan’s D’Avola said. “The conditions are there, there’s liquidity, and our region offers value when you look at the quality of the potential issuers you can bring to investors.”