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Friday, 20 October 2017

Doing the dance of debt

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The pressure of its debt means that Brazilian oil giant Petrobras needs to think outside the traditional dollar market.

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Companies tend to trumpet the international awards that they have won. It is unlikely, however, that Petroleo Brasileiro SA, better known as Petrobras, is likely to shout too loudly about the fact that Bank of America Merrill Lynch named it the world’s most indebted company in a report last year. Debt currently sits at a hefty US$114.3bn.

The Rio de Janeiro-based state-owned oil firm has sold the bulk of the US$13bn paper it wanted to in the international markets this year, but it is still looking down the barrel of refinancing costs of an eye-watering US$18bn in 2015. With some understatement, Christopher Buck, analyst at Barclays, pointed out in a recent note, that these are “higher issuance needs” than in previous years.

With that on its mind, Petrobras was out of the gate in early January with an impressive US$5bn equivalent deal into the euro and sterling markets; a deal even more impressive as books hit US$16bn. The four, seven, and 11-year euro tranches all priced tightly and inside the spread of equivalent dollar paper. The 6.625% 20-year sterling paper tranche priced well too, coming in during pricing from Gilts plus 325bp to a final price of Gilts plus 315bp.

In one sense this should not be a surprise. Petrobras is a known and welcome name in the markets. Last year it pulled off the largest emerging market bond sale ever with a US$11bn six-tranche deal that, despite the volatility of Treasuries, traded well after the break. But this intense level of financing pressure means Petrobras needs to think more innovatively about where it can raise debt.

By the end of February it emerged that the company was looking at the Schuldschein private placement market in Germany for a four-tranche deal via HSBC. At the same time it was also looking at a possible R$1bn deal into the domestic market. That would be Petrobras’ first since 2002.

Given its annual foray into the US dollar market and the attractive prices seen on Petrobras paper (more than 200bp over similarly rated US oil names) in mid-March, it then easily managed to sell a US$8.5bn six-part bond with a US$23bn order book on March 10. 

At first glance it is an impressive deal, but it is notably smaller than the previous year’s dollar deal and with considerably less demand than usual. More to the point, the more-than-average premium that Petrobras had to pay suggests that accounts are near their limits on Petrobras. It is worth noting that pricing on the 10-year tranche only tightened in 10bp from guidance to Treasuries plus 350bp and the company had to pay a steep new-issue premium of 35bp on the six-year paper.

The dollar deal takes the company pretty much up to its issuance target for 2014, but the pressure on Petrobras is acute.

Fourth-quarter figures, released at the end of February, were not the greatest. Net income in the last three months of 2013 dropped 19% to R$6.28bn (US$2.68bn) from R$7.8bn the previous year. Petrol price controls together with increased demand from Brazil’s growing middle class consumers have forced Petrobras to import fuel over the past few years. It is a move that has cost the company billions of dollars.

To get itself back on track, Petrobras has been forced to set up a number of aggressive measures: it has increased the price of petrol and diesel at home – both saw rises of 4% and 8% respectively at the end of last year. This brings domestic fuel prices more in line with world prices.

“We can’t improve our investment situation without a convergence in fuel prices,” said chief executive Maria das Gracas Foster during an analyst call at the end of February.

But the company has longer-term plans too. It has chopped US$16bn off its five-year investment plan. It now intends to spend US$221bn up to 2018, down from US$237bn in its previous five-year plan.

Petrobras also plans to bring its leverage under control. Fourth-quarter figures showed that it has breached its 2.5 times target and net leverage for 2013 was an unsettling 3.2 times. To reassure ratings agencies, it has said it will bring this down by 2015. The company is still investment grade – Baa1/BBB/BBB – though on shaky ground.

Will it work? Not all are convinced. “Optimistic assumptions – [based on] aggressive long-term production targets, price parity, strong local currency,” said Christian Audi and Gustavo Allevato, analysts at Banco Santander.

But others are more encouraged.

“Normalised results were slightly better than our model, but we focus on the long-term strategic plan. By defining its optimum oil output size at 4.0Mbbl/d, Petrobras sends a message that capex will indeed peak in the medium term, opening room for the market to see a path for free cashflow generation capacity,” said Bruno Montanari, analyst at Morgan Stanley. 

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