Petrobras Credit Traders Signal Brazil Support Not Enough

As the fallout from a widening bribery probe plunges Petroleo Brasileiro SA into junk, derivatives traders are signaling that government support alone may not be enough to stave off more ratings cuts.

Compared with the cost to protect Brazil’s debt against default, contracts on Petrobras bonds have more than doubled since the allegations of kickbacks and bribes at the state-controlled oil producer surfaced in November. The premium jumped to 3.50 percentage points last week, the most on record.

Moody’s Investors Service chopped Petrobras’s credit rating two levels this week on concern the investigation will crimp the company’s ability to obtain financing and trim its $135 billion debt load, the most among publicly traded oil producers.

“The government seems to be willing to provide support for the company, but that doesn’t seem to be enough” when it comes to its credit quality, Paulo Gala, a strategist at Fator SA Corretora de Valores, said by telephone from Sao Paulo.

The government offered Petrobras as much as 6 billion reais ($2.1 billion) from state banks to strengthen the company’s cash position, newspaper Estado de S. Paulo reported Thursday, citing an unidentified executive at the company. Petrobras, which has been all but shut out from overseas debt markets due to a federal probe, has about $52 billion of bonds.

Rating Cut

Petrobras’s press office declined to comment on potential government support or the Estado report.

In a statement Wednesday, the Rio de Janeiro-based company said it’s exploring financing options and studying cost cuts following the downgrade by Moody’s a day earlier.

Petrobras also said it plans to release audited results “as soon as possible” and is taking steps to preserve cash and cut its debt load.

Moody’s kept a negative outlook on Petrobras’s rating after cutting it to Ba2, two levels below investment grade and three steps lower than the government. The two-step downgrade marks the second cut by Moody’s in less than a month.

While government support is likely, it won’t be sufficient to prevent more downgrades to junk, said Fabiano Santin, a credit analyst at XP Investimentos CCTVM SA.

“If you’re in, I’d get out, because the probability of another downgrade is real,” he said from Rio de Janeiro.

Swaps Soar

Fitch Ratings and Standard & Poor’s rate Petrobras BBB-, the lowest investment grade. Fitch said in an e-mailed response to questions that it hasn’t changed its outlook on Petrobras. S&P declined to comment about a potential change on the company’s rating.

Petrobras’s five-year credit default swaps have soared 2.8 percentage points to 6.06 percentage points since Nov. 13, the day before police arrested more than 20 people as part of an investigation into whether company executives demanded bribes from builders in exchange for contracts. Similar contracts for Brazil cost 2.56 percentage points.

The oil company’s $2.5 billion in bonds due in 2024 rose 1.20 cents to 91.72 cents on the dollar Friday, paring its drop this week to 1.72 cents.

While Brazil doesn’t explicitly guarantee Petrobras’s debt, the government’s role as the company biggest shareholder has historically given investors confidence that state support in a time of distress would be all but assured.

Finance Minister Joaquim Levy signaled this year that there would be more fiscal austerity and a smaller role for public banks.

“There will be other downgrades,” Jorge Piedrahita, the chief executive officer of brokerage Torino Capital in New York, said in an e-mail. “Petrobras’s business is still in disarray.”

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