Brazil's Record Overseas Borrowing Comes Back to Bite Companies

  • Brazil companies' foreign debt rose seven fold in past decade
  • Corporate bonds from Brazil are region's worst performers

Brazilian companies including state oil producer Petrobras are at risk from a weakening real after they issued a record amount of debt in foreign currency. The mismatch prompted President Dilma Rousseff to say over the weekend that she’s “extremely concerned” about the situation.

Borrowing in overseas markets by non-finance companies reached a record $137 billion last year, seven times the level just a decade earlier, according to the Bank for International Settlements. Petroleo Brasileiro SA, with $56 billion of outstanding bonds, has become the world’s largest non-investment grade corporate issuer after Standard & Poor’s cut its rating this month following a similar move by Moody’s Investors Service.

Brazil’s corporate debt is the worst performing in Latin America this year, losing 13 percent as the real plummeted the most among major currencies. Brazilian assets have been battered by concern that Rousseff will struggle to pull the country out of its longest recession since the 1930s and curb inflation near a 12-year high. While some borrowers have currency hedges to protect themselves, or make up for a weaker real by exporting more, others will see the cost of the debt swell as their earnings shrink in dollar terms.

Brazilian companies are now suffering from what the economists Ricardo Hausmann and Barry Eichengreen dubbed “Original Sin” in a paper presented at a Federal Reserve conference in 1999. Namely, by borrowing in dollars, companies exposed themselves to the risk that their currencies would weaken in the midst of domestic economic problems, making them doubly vulnerable. While governments across Latin America have sought to boost the size of their local bond markets so that they rely less on overseas funding, growth in Brazilian issuance hasn’t kept pace with international offerings.

Fitch Ratings last month identified four Brazilian companies particularly vulnerable in a currency meltdown. Bonds from the borrowers -- Petrobras, state-controlled Centrais Eletricas Brasileiras SA, airline Gol Linhas Aereas Inteligentes SA and mall operator General Shopping Brasil SA -- have fared poorly this quarter.

Eletrobras’s press office said revenue in dollars offsets debt in that currency. Gol’s press office declined to comment. General Shopping wouldn’t comment because it is in a quiet period until Oct. 15. Petrobras’s press office didn’t reply to a message seeking comment.

Brazil’s real dropped the most among major currencies Monday as data showed a manufacturing slowdown in China, its largest trading partner, and after Fitch Ratings said it could cut the country’s classification at any time. While Fitch rates Brazil two levels above investment grade, S&P cut the country’s credit rating to junk earlier this month.

"I don’t think you could find a single company that was expecting the dollar to be trading at this level now," Joao Paulo de Gracia Correa, a foreign-exchange manager at SLW Corretora de Valores, said from Curitiba, Brazil. "We definitely see many companies concerned about how they can diminish their exposure and hedge it as much as they can."

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