Petrobras tests investor sentiment with US$6.75b bond sale

[SAO PAULO] State-controlled Petróleo Brasileiro SA raised US$6.75 billion on Tuesday through a sale of five- and 10-year US dollar-denominated bonds, in a closely watched return to global capital markets after the suspension of Brazilian President Dilma Rousseff.

The bond sale is the first by any Brazilian company since last June and the first to test investor sentiment toward Brazil since Ms Rousseff was removed from office last week to face an impeachment trial.

Petrobras, as the company is known, also announced a plan to repurchase up to US$3 billion of bonds maturing in 2018 and debt bearing interest of 8.375 per cent.

Analysts and investors have said Petrobras, which for years was Ms Rousseff's favorite tool to implement policies that helped drive Brazil into a recession not seen in eight decades, could gain most from the change in Brazil's leadership.

For years, Ms Rousseff forced Petrobras to borrow beyond capacity and overspend to bolster her Workers Party's political agenda. It is now saddled with the oil industry's largest debt.

In a strong sign of backing for a company that was the largest emerging market corporate borrower this century, investors had placed US$20 billion worth of bids for the new securities by early afternoon on Tuesday, two sources familiar with the deal said.

The unexpected offering is Petrobras' first attempt to sell bonds on global debt markets since June 1, when it placed US$2.5 billion worth of bonds maturing in 2115.

The company borrowed from Chinese government agencies in recent months to counter the impact of plunging oil prices, restricted access to capital markets and fallout from the sweeping corruption scandal that accelerated Ms Rousseff's fall.

"Petrobras needed to tap the market, since one of the company's pressing issues remains liquidity," said Eduardo Vieira, an analyst with Deutsche Bank Securities in New York.

The Petrobras offering could help pave the way for other Brazilian companies to raise money from global bond investors, which could benefit from Ms Rousseff's exit and optimism that her replacement may implement more business-friendly policies, he added.

The last Brazilian company to sell debt to international investors was planemaker Embraer SA, which sold US$1 billion of 10-year bonds on June 8, according to Thomson Reuters data.

The reopening of debt markets for Brazilian companies will be "very gradual," Mr Vieira added.

Brazil's Senate voted last week to impeach Ms Rousseff and she faces trial on charges of breaking budgetary rules. Vice President Michel Temer, now serving as interim president, has vowed to end Ms Rousseff's budget profligacy and reduce long-term spending.

COSTLY DEAL

Petrobras hired the investment-banking unit of Banco do Brasil SA to handle the bond sale, along with Bank of America Corp, JPMorgan Chase & Co and Banco Santander SA, according to the sources familiar with the deal.

The company launched the sale of US$5 billion in five-year notes at 8.625 per cent and US$1.75 billion in 10-year notes at 9 per cent. The company last sold five and 10-year debt in March 2014, at an interest of 4.875 per cent and 6.256 per cent, respectively.

Proceeds from the sale of the senior unsecured notes will be used to fund the buyback of bonds maturing in 2018, the sources added. Petrobras has about US$54 billion in outstanding bonds.

Strong demand from investors in the United States, Europe and Latin America is allowing Petrobras to cut borrowing costs on the planned bond sale, the sources said.

The company offered to pay around 8.75 per cent on the five-year portion of the sale, and 9.125 per cent for the 10-year bonds, they added.

"It may turn out to be a costly deal, even if the market response turns out to be very positive," Mr Vieira added.

Non-voting shares of Petrobras dropped as much as 3 per cent, reflecting concerns over the transaction's borrowing costs, traders said. The cost of insuring Petrobras debt against default for five years fell two basis points to 740 basis points on Tuesday, according to Markit prices.

Last week, chief financial officer Ivan Monteiro said on a conference call to discuss Petrobras' first-quarter results that an eventual market reopening could help the company pay down debts coming within the next five years.

Petrobras has US$33 billion of bonds coming due within the next five years, or about 60 per cent of outstanding bond debt.

"We need to adjust to the fact that we are no longer an investment-grade company," Mr Monteiro said last week. "The cost has risen."

The new bonds were rated "B3" by Moody's Investors Service, six levels below investment-grade. Until the scandal and the oil price slump undermined the company's finances, Petrobras had a debt rating higher than the Brazilian government's.

The deal is subject to consent of most bondholders, who will also be asked for their permission to change contractual terms of the securities, the filing said.

REUTERS