Petrobras US$4b bond wipeout is just prelude: Brazil Credit

[NEW YORK] The corruption scandal battering Petrobras has already cost bondholders US$4 billion. With the oil producer facing billions of dollars in writedowns, investors are bracing for even more pain.

Petroleo Brasileiro SA's US$41 billion of dollar-denominated debt has lost 10 per cent of its value since Nov 13, the day before the federal police said they found "strong evidence" that at least seven builders formed a cartel to win public contracts, including 59 billion reais (US$21 billion) in orders from the state-controlled oil company.

The bond losses could be poised to swell. That's because Petrobras may write down as much as US$32 billion stemming from Brazil's largest-ever graft probe and lose its investment grade, said Wilbur Matthews, the chief executive officer of Vaquero Global Investment LP.

"This is a deeply troubled company, and we should see more losses coming when the final numbers for writedowns are finally out," Mr Matthews, who oversees more than US$100 million in emerging-markets debt, said from San Antonio. "It would be a disaster seeing the company as a fallen angel and going to the junk category. And that seems not to be far from happening."

The company's notes sank further on Friday after President Dilma Rousseff picked a state-bank executive, Banco do Brasil SA Chief Executive Officer Aldemir Bendine, to run Petrobras. A week earlier, Moody's Investors Service cut the company's rating to the cusp of junk and threatened another downgrade within a month if it didn't clarify its earnings.

The government controls both Petrobras and Banco do Brasil with a majority of voting shares. Mr Bendine, 51, is set to take over from Maria das Gracas Foster, who announced her resignation Feb 4 after failing to broker a consensus on the cost of the escalating investigation.

Ms Foster said in a Jan 27 filing that the company found its assets were overvalued by as much as 88.6 billion reais.

BLOOMBERG