HSBC pitches Petrobras scandal-tainted rig bonds: Brazil Credit

[RIO DE JANEIRO] In the months since Brazil's largest bribery scandal broke, bond investors have fled companies tied to the alleged kickbacks. They've been far too hasty, according to HSBC Holdings Plc and Mizuho Securities USA.

Odebrecht Offshore Drilling and Queiroz Galvao Oil & Gas Constellation are a case in point. Their securities have plunged at least 27 per cent since Nov 13, when federal police said they found "strong evidence" that at least seven builders, including the parent companies of the two oil-rig providers, formed a cartel to win public contracts.

To Mizuho's John Haugh, the bonds are now a buy because the terms that govern them will likely shield the issuers from any punishment the parent companies may face if they're found guilty of bribing Petroleos Brasileiro SA, the state oil company. Not only is the money to pay these notes set aside in an escrow account, the long-term charter agreements with Petrobras backing the debt can only be terminated in cases where the rigs aren't delivered on time or are defective.

"These bonds are oversold and present an attractive entry point," Haugh, a Latin America corporate strategist, said by telephone from New York. "The charter agreements that back the bonds are not renegotiable prior to expiration." Odebrecht Offshore Drilling said that its notes have a solid package of guarantees including the drilling rigs, as well as receivables from long-term contracts. Salvador, Brazil-based parent Odebrecht SA referred questions to the unit. In a Dec 30 statement, Odebrecht said that all of its Petrobras contracts were obtained in competitive processes under established legislation.

The press office of Rio de Janeiro-based Queiroz Galvao Oil & Gas declined to comment on the allegations and the bond losses. Parent Queiroz Galvao SA, which referred requests for comment to the unit, said in a Nov 14 statement that all of its contracts are within the law.

Since the end of December, Petrobras has banned more than 20 builders including Odebrecht and Queiroz Galvao from bidding on contracts pending the outcome of an investigation that has roiled the nation's financial markets and fueled calls for the impeachment of President Dilma Rousseff.

Odebrecht Offshore Drilling's US$1.275 billion of notes due 2022 have lost 27 per cent since Nov 13 to 74.29 cents on the dollar. The notes are now distressed, yielding 11.53 percentage points over similar-maturity US Treasuries.

The US$700 million of 2019 notes sold by Queiroz Galvao Oil & Gas have plummeted 46 per cent in the same span to 52.51 cents on the dollar. At 23.36 per cent, they yield three times the average for junk-rated emerging-market debt.

The bonds are a bargain because the long-term contracts provide cash-flow visibility and are devoid of clauses that could be exploited by Petrobras to void the charter agreements if the parent companies are found guilty, HSBC analysts led by Sarah Leshner said in a Feb 4 report.

"Secured drill-rig bonds offer the most attractive risk- return for a patient holder," they wrote.

The rig companies also benefit from renting strategically critical equipment to Petrobras.

Alexis Panton, a strategist at Jefferies Group LLC, still recommends investors stay away.

"In these volatile times, we cannot rule out the possibility of a renegotiation," he said in a note to clients.

Mizuho's Haugh said that most of the contracts that back Queiroz Galvao Oil & Gas's bonds expire in 2018, a year before the notes mature and ensuring debt payments are covered for the next several years. And while declining to provide a fair-value estimate for the rig providers' bonds, he said investors demand too much in yield relative to Petrobras's notes.

Queiroz Galvao Oil & Gas's 2019 debt yields 15.7 percentage points more than similar-maturity securities from Petrobras, data compiled by Bloomberg show.

"There is enough asset value to cover all debt at Queiroz Galvao Oil & Gas and its subsidiaries," Haugh said. "These bonds should trade at a closer spread to Petrobras."

BLOOMBERG