Bloomberg News

Petrobras’s $25 Billion of Bids Signal No Glut: Brazil Credit

February 02, 2012

Feb. 2 (Bloomberg) -- Petroleo Brasileiro SA’s dollar bonds are posting their biggest rally in eight weeks, dispelling concern the Brazilian state-owned oil producer’s record $7 billion offering yesterday will create a glut.

Yields on Petrobras’s notes due in 2021 have dropped 21 basis points in the past five days, the most since the week ended Dec. 7, to an 11-week low of 4.64 percent. Yields on emerging-market corporate debt rated investment grade fell nine basis points, or 0.09 percentage point, during the same period to 4.92 percent, JPMorgan Chase & Co. data show. Petrobras’s notes yield 136 basis points more than similar-maturity Brazilian government debt, down from 161 on Jan. 23.

Speculation Petrobras’s bonds may slump as the company raises a record amount of financing in overseas markets is fading amid growing demand from investors seeking alternatives to European assets and lower-yielding investment-grade debt. The Rio de Janeiro-based company plans to borrow as much as $18 billion a year through 2015, mainly from international markets, to more than double production by 2020 and develop the largest oil discovery in the Americas in more than three decades.

“There are not a lot of places you can go as an investor and feel real comfortable,” Alfredo Viegas, managing director of emerging markets at Knight Capital in Greenwich, Connecticut, said in a telephone interview. “If you’re looking for a dollar bond that’s high grade that you can trust and don’t have a lot of concern about, Petrobras is a relatively decent proxy for that. The challenges in the eurozone have created greater demand for high-grade non-eurozone growth stories.”

Issuance Plans

Petrobras’s offering attracted about $25 billion worth of bids, said Surat Maheshwari, head of international syndications at Itau BBA USA Securities, which helped manage the transaction with BB Securities, Citigroup Inc., JPMorgan Chase & Co., Morgan Stanley and Banco Santander.

The oil producer is rated A3 by Moody’s Investors Service, four steps above junk, and BBB by Standard & poor’s and Fitch Ratings, the second lowest level of investment grade.

Petrobras said in an e-mailed statement that it will use proceeds from the bond sale to finance investments. A company official in Rio de Janeiro declined to comment further.

Chief Financial Officer Almir Barbassa said in a Jan. 12 interview that the company is seeking to sell this year an amount similar to the $9.6 billion of debt it issued in 2011.

Petrobras sold $1.25 billion of three-year bonds to yield 275 basis points above U.S. Treasuries yesterday and $1.75 billion of five-year debt at a spread of 290 basis points. The company also sold $2.75 billion more of its bonds maturing in 2021 to yield 295 basis points above Treasuries, and $1.25 billion more of its 2041 securities at a spread of 295 basis points.

‘Expanded Base’

The sale matched SABMiller Plc’s $7 billion offering last month as the largest dollar-denominated corporate bond issue this year, according to data compiled by Bloomberg.

“If you think of European corporates, European sovereigns, there probably is still concern about that, so you go into emerging markets,” Edgardo Sternberg, an emerging-market debt strategist at Boston-based Loomis Sayles & Co., said in a telephone interview. “That’s part of the expanded base that you have since last year. There’s enough appetite from outside investors that have too much cash. People feel that they’ll just probably tighten quickly.”

Petrobras is adding to an issuance boom in international markets sparked by rising demand for emerging-market assets. Developing-nation borrowers issued $40.2 billion of dollar debt last month, according to data compiled by Bloomberg.

Yield Reduction

Su Fei Koo, who helps manage about $850 million in emerging-market debt at DoubleLine Capital LP, said Petrobras’s decision to reduce the yield it offered on its bonds twice prior to the sale made the securities less attractive.

“It’s offering some type of concession but it’s not as good as the guidance that came out” initially, Koo said in a telephone interview from Los Angeles.

Petrobras’s shares gained 1.5 percent yesterday to 24.95 reais. The stock is up 16 percent this year, compared with a gain of 14 percent for Brazil’s benchmark Bovespa index.

Concern Petrobras’s borrowings would create an oversupply of debt in the secondary market drove up the company’s yields relative to government debt. Its bonds due in 2021 yielded as much as 164 basis points more than similar-maturity government debt last year.

The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries narrowed 10 basis points yesterday to 216, according to JPMorgan.

Default Swaps

The cost of protecting Brazilian bonds against default for five years slipped four basis points to 141, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

The real strengthened 0.7 percent to 1.7343 per dollar.

The yield on the overnight interest-rate futures contract due in January 2013 dropped three basis points to 9.5 percent.

Petrobras said Jan. 23 it plans to name Maria das Gracas Foster to replace Chief Executive Officer Jose Sergio Gabrielli. The company is raising cash to help finance $224.7 billion of investments in the five years through 2015.

Petrobras’s offering pushed international debt issuance by Brazilian companies to $12.3 billion this year, compared with $10.5 billion in the same period last year, according to data compiled by Bloomberg.

“Some of these quasi-sovereigns appeal to a bigger audience of buyers, also U.S. investment-grade buyers,” Knight Capital’s Viegas said. “I don’t see digestion being a problem.”

--With assistance from Veronica Navarro Espinosa, Tim Catts, Christine Jenkins and Drew Benson in New York, and Peter Millard in Rio de Janeiro. Editors: Lester Pimentel, David Papadopoulos

To contact the reporters on this story: Boris Korby in New York at bkorby1@bloomberg.net; Gabrielle Coppola in Sao Paulo at gcoppola@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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