Saturday, 22 September 2018

Petrobras goes all out for a Century

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  • People enter and leave the headquarters building of Brazilian state oil company Petrobras in Rio de Janeiro

Brazil’s Petrobras bet big and won last week after printing a US$2.5bn Century bond – the largest-ever trade with this tenor and the oil company’s first bond sale since a corruption scandal locked it out of the capital markets last year.

Few thought the company, still reeling from a high-profile investigation into kick-backs, was prepared for a capital markets comeback, let alone a rare 100-year offering.

But Petrobras (rated Ba2/BBB–/BBB–) proved naysayers wrong after building a US$13bn book for an offering carefully crafted to turn heads and to firmly reopen the beleaguered credit’s access to international bond funding.

“This was not a curve-building or fundraising exercise, it was about making a statement,” said a banker.

Critics were quick to question the logic of investing in a 100-year bond ahead of US rate hikes, especially one issued by an oil company racked by controversy and whose proven reserves last just 17 years.

Nor did many bankers understand why the world’s most indebted issuer would raise long-term money when cheaper funding options were available elsewhere along its curve.

Yet ultimately the buyside’s appetite for yield and growing faith in the new management’s turnaround story overshadowed fears about deteriorating fundamentals or any potential downgrade into junk territory.

The idea – which grew from enquiries among yield-hungry accounts already familiar with the credit – was bold. But it was also a risky bet for a company that could ill afford to flop in its first bond foray in 14 months.

Newly installed CFO Ivan Monteiro also separated himself from previous management by selecting just two leads – Deutsche Bank and JP Morgan.

This marked a shift in strategy for an issuer that in the past handed out mandates to a string of financial institutions based on their willingness to provide sizeable bilateral loans. Neither bank is known to be a big lender to the company.

Anchor orders lessened the possibility of failure, but leads took few chances, offering generous pricing from the start and guiding investors with a modest size of between US$500m and US$1bn.

“They were saying don’t look at the final maturity but at the duration. That was the brilliance of the trade”

At initial price thoughts of the 8.85% area, investors would have enjoyed a pick-up of approximately 150bp to the 30-year part of the borrower’s curve, where the existing 2043s and 2044s had been trading at 7.23% and 7.40% respectively.

At the final yield of the 8.45% area, that shrank to around 110bp, but was still considerably wider than the 80bp–85bp differential seen on Mexico’s 30s to 100s curve.

It was also nicely within the 8% target that pension funds are widely seen needing to fund their long-term liabilities.

More yield, no duration

Perhaps more important though, investors found the 100-year bond particularly irresistible because that yield pick-up from 30 to 100-year bonds came with virtually no additional duration.

Duration – which measures a bond’s sensitivity to interest rate movements – has become a particularly important gauge for risk ahead of a potential Fed tightening later this year. If it had been higher on the 100-year, bankers argue that demand may have declined.

Duration on Petrobras’s 2043s and 2044s was around 12.4 and 11.6 on Thursday versus about 12 on the 2115. Yet the Century bond priced at a final yield of 8.45% versus secondary levels of around 7.30% in the 30-year section of the curve.

“They were saying don’t look at the final maturity but at the duration,” said another banker away from the trade. “That was the brilliance of the trade.”

Leads were also quick to flag that Petrobras would price the bond at a steep discount of around 80 cents to the dollar.

Not only did this provide investors with less downside risk in a credit event or another taper tantrum, but it also allowed Petrobras to cut the coupon to 6.85%, albeit with smaller proceeds.

While funding costs have certainly soared for the company in the wake of the corruption scandal and Moody’s decision to downgrade it to junk, the 6.85% coupon on the new bond is lower than the 7.25% coupon seen on its 2044s.

Petrobras now joins a small but growing club of issuers that have raised 100-year money in the bond markets, becoming the third Latin American borrower in recent years to extend maturities this far. Mexico first issued a Century bond in 2010, while Chile’s Endesa came with its own 100-year in 1997.

It is also the largest trade of its kind, standing just above EDF’s £1.35bn Century issued in January last year, according to Thomson Reuters data.

“The deal should be interpreted as positive to the extent that they are able to access the debt markets and extend duration so significantly,” said Jack Deino, head of emerging market portfolio management at Invesco.

Credit positive

It is also seen as credit positive from the perspective of ratings agencies.

“It will be viewed as a positive step in regaining access to the debt capital markets, which it relies on to support its investment plan and funding needs,” said Lucas Aristizabal, a senior director at Fitch.

A more conventional bond trade is expected to come as soon as the second half once Petrobras presents its new business plan to the buyside.

Whether Petrobras can replicate the success of the 100-year deal, however, is open to debate, given the unique dynamics at play with the trade.

It may not be able to be so generous on bonds of a shorter tenor, though bankers do not discount the possibility that Petrobras may follow in Mexico’s footsteps and try its luck with a Century in euros, an increasingly popular currency among Brazilian issuers.

(A version of this story will appear in the June 6 issue of the weekly International Financing Review, a Thomson Reuters publication)

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