Lehman-Style Credit Freeze Shows Petrobras Graft Fallout

For all practical purposes, Brazil’s overseas bond market is frozen.

It’s been four months since a Brazilian company issued debt internationally. The last time borrowers were shut out for this long was in 2008, when the implosion of Lehman Brothers Holdings Inc. caused credit to seize up around the world.

The drought is emblematic of how far Brazil has fallen in the eyes of investors as the economy founders and the fallout from Petroleo Brasileiro SA’s kickback scandal ensnares the nation’s companies. Since the bribery allegations at Petrobras surfaced in November, borrowing costs for Brazilian companies have soared six times more than the emerging-market average.

“Ideally, you only want additional debt when the outlook is bright, and that’s not the case right now for the majority of companies,” Josephine Shea, the co-head of emerging-market debt at Hartford Investment Management, which oversees about $110 billion, said by telephone from Hartford, Connecticut.

At this time last year, Brazilian companies had already sold $7.5 billion of debt abroad.

Petrobras, which has been the biggest emerging-market issuer of overseas bonds in the past four years, hasn’t issued debt abroad since March 2014 as the bribery probe prevents it from reporting audited financial results.

Moody’s Investors Service chopped the company’s rating by two levels to junk on Feb. 24, the second downgrade in less than a month, on concern the investigation will crimp its ability to obtain financing. The downgrades are part of at least 28 rating cuts suffered by Brazilian companies this year alone.

JBS, Marfrig

Petrobras said Thursday that its board of directors has authorized it to raise $19.1 billion in financing this year.

The company’s press office didn’t reply to an e-mail seeking comment on its plans to issue bonds.

If the Rio de Janeiro-based oil producer decides to turn to the overseas debt markets, it will have to pay up. Yields on its notes due in 2021 have surged 1.7 percentage points to 7 percent since Nov. 13, the day before police arrested more than 20 people as part of a probe into whether Petrobras executives demanded bribes from builders in exchange for contracts.

The dearth of issuance isn’t “likely to change anytime soon,” Ian McCall, who helps manage $103 million at Quesnell Capital SA, said by telephone from Cascais, Portugal. “We need to have some kind of clarity on the Petrobras front.”

JBS SA, the world’s biggest meat producer, and Marfrig Global Foods SA pulled bond sales in the weeks after the arrests. Neither company has been implicated in the probe.

Market’s Closed

The Brazilian real’s deepening slide is proving to be another obstacle for borrowers as it makes the costlier to pay foreign-currency obligations.

The real has plummeted 12 percent this year and weakened past 3 per dollar for the first time in a decade on Wednesday as the economy falters and the nation’s finances deteriorate. The currency lost 1.7 percent to 3.0534 per dollar as of 2:23 p.m. in New York.

Latin America’s biggest economy will shrink 0.58 percent in 2015, which would be the most since 1990, according to a central bank survey of economists Monday.

The gloomy economic outlook, coupled with growing opposition to President Dilma Rousseff’s efforts to reduce a record budget deficit, is stoking concern that Brazil may suffer a downgrade itself. Moody’s put Brazil’s rating on negative outlook in September, six months after Standard & Poor’s cut the nation to the cusp of junk.

“The plunge in the real has a large impact,” Marco Aurelio de Sa, the head of fixed-income trading at Credit Agricole SA’s Miami brokerage unit, said in an e-mail. “The market should remain closed for Brazil while we have this political crisis.”

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