Petrobras downgrade shakes market
By Paul Kilby
NEW YORK, Feb 27 (IFR) - Moody's shocked bond investors this week with a surprise two-notch downgrade that put Brazilian oil company Petrobras in junk territory. The move was seen by some investors as overly assertive, leaving them to add exposure incrementally.
"It was aggressive," said Jack Deino, head of emerging market portfolio management and senior portfolio manager at Invesco. "It just reflects the rating agencies' proclivity to shoot from the hip. Ever since the global financial crisis, they have been clamped down on and now they seem trigger-happy."
In late January, Moody's demoted the company to Baa3 from Baa2, warning more ratings actions were on the horizon if the company failed to release audited results. It stuck to its word, exceeding expectation with a cut to Ba2 late on Tuesday.
So far, the massive wave of forced selling out of high-grade account portfolios has yet to truly transpire. Bonds tumbled in response to the Moody's rating cut, but not as dramatically as some had thought was likely.
Spreads on the company's benchmark 6.25% 2024s widened about 40bp during the two days following the announcement to reach a wide of around 572bp before tightening back to 570bp, still south of the recent 609bp peak seen in early February when Fitch placed the company a notch above junk at BBB- with a negative outlook.
The coming month could see some further spread-widening as JP Morgan prepares to disqualify some US$42.5bn of Petrobras's US$55.7bn bond debt from its US Liquid Index (JULI) on March 2. Bank of America Merrill Lynch will do the same next month on its US dollar high-grade benchmark index C0A0.
Rules governing Barclays high-grade maintain Petrobras's current standing - but would exclude it if another ratings agency were to demote it to junk. That agency could be Fitch, given the negative outlook on its BBB- rating.
S&P has a stable outlook and considers strong government support when assessing its BBB- rating. It has already lowered its standalone credit to BB from BBB- and said that would have to drop to B to impact on the broader rating. Continuación...