Petrobras, Bond-Market Pariah, Suddenly Captivates Deutsche Bankby , , and
Some shorter-dated notes yield more than longer-term bonds
World's largest junk issuer has most of its debt due by 2021
For much of the past year, Petroleo Brasileiro SA’s unrelenting rout has pushed down bond prices to new lows day after day.
Now, Deutsche Bank AG is finally starting to see value in the state-controlled oil producer’s debt.
The strategy is simple: buy its $3.35 billion of notes due in 2017 -- whose yields have more than tripled to about 8.7 percent -- because Petrobras will have no problem paying its obligations over the next few years without government support.
But beyond that, yields still aren’t high enough to compensate for the risks tied to refinancing, the slump in oil and a weaker Brazilian currency, Deutsche Bank’s Eduardo Vieira wrote in a report dated Oct. 7. It’s the first time Vieira has recommended buying bonds issued by Petrobras since a bribery investigation involving company executives began in November 2014.
“The company has a lot of debt due in the short term, but they have several ways of refinancing themselves,” said Carlos Gribel, the Miami-based head of fixed income at Andbanc Brokerage. “The chance of default is very low.”
It’s a bold call by Deutsche Bank. Rocked by the ever-widening graft probe, Petrobras has seen borrowing costs on its debt soar as bond traders questioned its creditworthiness. The situation has deteriorated so fast in the past year that some of its shorter-term debt actually yield more than its longer-term obligations, a phenomenon known as an “inverted yield curve,” which highlights the heightened risk of default.
Those risks were on display this week, when the company, which has more junk-rated debt than any other company in the world, canceled a 3 billion-real ($790 million) local bond sale because of lackluster demand. On average, Petrobras’s overseas bonds have lost 15 percent since the bribery allegations first surfaced. Brazil’s currency has fallen 31 percent this year as of 2:11 p.m. in New York on Friday.
Still, some are starting to come around to the idea the dangers may be overblown. The extra yield that investors demand to own Petrobras’s notes due in four years, instead of its six-year debt, has decreased by 1.7 percentage point this month.
There are investors who “seem to be seeing an opportunity in short-maturity bonds from Petrobras,” said Patricia Moraes, the head of corporate and investment banking at JPMorgan Chase & Co.’s Brazil unit. “That’s because there is a perception that the company will fulfill its commitment in the short term.”
Before the corruption scandal erupted about last year, the company’s longer-dated notes yielded as much as 0.84 percentage point more than the 2019 bonds, which is more typical when investors are confident in a company’s ability to repay.
“The default risk is concentrated on the shorter term," said Ian McCall, a money manager at Geneva-based Quesnell Capital, who holds Petrobras’s bonds. But “when a company faces problems like Petrobras is facing, opportunistic investors want to buy the lower cash price bonds.”
Because the bonds are so-called quasi-sovereigns -- corporate bonds that have implicit government backing -- they’re seen as less risky than those from companies without state sponsorship. Traders see only a 2.08 percent chance the company will default within the next year, according to data compiled by Bloomberg, down from a record 2.83 percent on Sept. 29.
This month, Petrobras bonds have rallied as the company unexpectedly announced it was raising prices for the fuel it sells in Brazil, the first increase in almost a year. The oil producer also said it was cutting investments. The moves, while positive for the company, aren’t enough to erase concerns about its debt payments after the next four to nine years, according to Deutsche’s Vieira.
Moody’s Investors Service said on Oct. 8 that Petrobras’s debt profile will remain “under stress” next year, as the company needs to cut expenses, sell assets, sell more debt or raise gasoline prices again to preserve liquidity. Further fuel-price increases at the government-controlled company may not be forthcoming as inflation nears 10 percent, more than twice the level targeted by policy makers, the ratings company said.
“I’d stick to the short-term notes, enjoying the higher yield,” Andbanc’s Gribel said. “They’re undervalued.”