Energy Business

Does the Petrobras 100-Year Bond Offering Have a Government Guarantee?

Another issue is that PGF may redeem, in whole or in part, these notes at any time by paying the greater of the principal amount of the notes and the “make-whole” amount, plus accrued interest. The notes will also be redeemable without premium prior to maturity at PGF’s option solely on the imposition of certain withholding taxes.

PGF intends to apply to have these notes approved for listing on the New York Stock Exchange.

The common American depositary shares (ADSs) of Petrobras rose from $8.37 on Monday to $8.92 on Tuesday. They were up another 2.2% at $9.12 Wednesday morning. Petrobras remains a troubled entity, and it is perhaps the most complex and risky of the global oil giants that trade in the United States. Still, think about this: if there is strong demand for a 100-year bond offering with such callable and takeaway clauses for a company that is as anti-investor as Petrobras, how on earth could you not expect the stock to rise on the news?

What is equally amazing here is that this week’s ratings agency news gave favorable ratings from what has been seen so far. Fitch Ratings assigned a BBB- rating, which is investment grade. Standard & Poor’s also went with a BBB- rating. Fitch said (emphasis added):

Petrobras’ ratings continue to reflect its close linkage with the sovereign rating of Brazil due to the government’s control of the company and its strategic importance to Brazil as its near monopoly supplier of liquid fuels. Absent implicit and explicit government support and its defacto monopoly position, Petrobras’ credit quality is not commensurate with an investment grade rating. Government support is evidenced by the recent lending commitments offered by stated-owned Banco do Brasil and Caixa Economica Federal as well as the decision to maintain gasoline and diesel prices at the pump significantly above international levels in order to bolster Petrobras’ cash flow generation. By law, the federal government must hold at least a majority of Petrobras’ voting stock. The government currently owns 60.5% of Petrobras’ voting rights, directly and indirectly, and has an overall economic stake in the company of 48.9%. Petrobras’ cash position is sufficient to meet its short-term funding needs.

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Moody’s gave a junk-bond rating of Ba2. Its rating hinted at government support, and that said (emphasis added):

Near term financial performance will worsen before it could start gradually improving in the next couple of years, as oil prices start a solid upward trend. Petrobras’ high financial debt, which reached close to USD125 billion (as reported) in March 2015, compares to the company’s expectation of generating USD25 billion in operating cash and spending USD29 billion in capex in 2015. Petrobras plans to borrow USD13 billion during 2015, to end the year with USD20 billion in cash… Our assumptions are of high support from the government of Brazil (Baa2 negative) and moderate dependence between Petrobras and the government. The government support provides three notches of uplift to Petrobras’ BCA. 

Let’s assume for a second that Brazil really does have an implied guarantee here. Over and over, despite great opportunity and despite many great expansionary periods, Brazil just often lands in situations where it consistently falls short of its potential. The nation is also currently under a socialist-leaning regime rather than one that is bent on creating economic growth. That may also change multiple times over the next 100 years.

Whether or not these bonds come with an implied guarantee, collecting the money through time may be harder than some investors think.

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