Petrobras Bond Plan Said Quashed as Brazil Fights Rating Cut

Brazil withdrew backing for a proposed Petroleo Brasileiro SA local bond as the country fights to avoid following the oil driller into junk credit-rating status, said a government official with direct knowledge of the matter.

Finance Minister Joaquim Levy ruled out the possibility of Brazil’s Treasury guaranteeing a bond backed by about 9 billion reais ($2.9 billion) owed to Petrobras by a state power company, the official said, asking not to be named because the decision wasn’t made public.

The proposal was revealed in December by outgoing Energy Minister Edison Lobao. The finance ministry and Petrobras declined to comment in e-mailed responses.

The decision by Levy, who took office in January, indicates Petrobras will be left to its own devices to fund investments. The state-run company is all but shut out of overseas credit markets as it grapples with methodologies to recognize corruption losses in financial results.

“Levy’s attitude is very different than the previous finance minister in relation to both the economy and Petrobras,” Cassia Inez Silva Pontes, an oil and gas analyst at Lopes Filho Consultoria de Investimentos SA, said by phone from Rio de Janeiro.

Less Interference

Moody’s chopped the company’s rating by two levels to junk on Feb. 24, six months after putting Brazil on negative outlook. The prospect of economic contraction this year and congressional opposition to President Dilma Rousseff’s efforts to reduce a record budget deficit are stoking concern that Brazil may suffer a downgrade itself.

Finance ministry officials received representatives from Standard & Poor’s last week to answer questions and demonstrate that Brazil’s economy remains solid. Economists expect Brazil’s economy to contract 0.66 percent in 2015 and end the year with 7.77 percent inflation, according to a Central Bank report published March 9.

Levy is more inclined than his predecessor Guido Mantega to let state companies fend for themselves, even if it means drastically cutting investments, the official said. This also means that eventually the government will interfere less in corporate decisions such as the price at which Petrobras sells fuel to consumers, the official said.

‘Limited Credibility’

Without Brazil’s Treasury standing behind a new local bond issue, Petrobras is running out of funding options for spending on its vast offshore oilfields. Since Rousseff was re-elected in October, Petrobras’ cost of credit has risen and its oil reserves have lost value, with the real weakening 21 percent while the global price of oil fell 34 percent.

“Petrobras’s credibility is limited, so it would have to turn to state banks if it needed cash urgently,” Pontes said.

Petrobras is also responding to a corruption scandal in which company executives allegedly directed hundreds of millions of dollars from overpriced contracts to politicians. Disagreement about the corruption writedown led to the departure of Chief Executive Officer Maria das Gracas Foster, who was replaced by state banker Aldemir Bendine.

The most urgent task facing Bendine’s team will be to get auditors to sign off on earnings. The world’s most indebted oil company has lost $270 billion in market value since May 2008.

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