NEW YORK, Oct 21 (IFR) - Bonds issued by RioPrevidencia, the state of Rio de Janeiro's public pension funds, rallied on Wednesday after it sought to cut a deal with creditors following covenant breaches earlier this year.
In a consent solicitation, the issuer asked bondholders to waive their ability to declare an event of default and in return it would increase coupons on its outstanding dollar notes by 300bp.
The borrower has left itself the option to cut interest rates by a maximum of 100bp if it passes certain milestones, including a restructuring of debt with the federal government. Bondholders have until November 3 to participate in the transaction, which is being run by BB Securities and BNP Paribas.
"It is a win-win for everyone," said a New York based trader. "For the company, because they will change covenants and for holders as there was never an upside in acceleration."
Fitch cut the issuer's rating to junk in October after it breached covenant ratios, raising the threat of an acceleration from bondholders.
The agency downgraded the debt to BB+ from BBB-, with a negative outlook, noting that lower oil prices had impacted debt service coverage ratios.
"It looks like they are trying to show bondholders they have a real intention to fix things," Mirian Abe, a director at Fitch's Latin America Structure Finance Group, said about the recent proposal.
The 2024s tumbled as low as 63.75 in late September, but were three points higher on Wednesday to hit 77.00, according to the trader.
The bonds are backed by oil royalties on concessionaires primarily operated by Petrobras, the state-owned oil company at the center of a widening corruption scandal.
The borrower raised US$3.1bn in the international capital markets in 2014 through the sale of a 6.75% 2027 and a 6.2% 2024s. Banco do Brasil and BNP Paribas acted as leads on both offerings.
In a September report, BNP had pointed out that the company's forward-looking debt service coverage ratios for the fourth quarter stood at 1.3x, or below minimum covenant requirements. This could have triggered an acceleration on the notes, if a majority of holders declared this an event of default, according to the report. (Reporting By Paul Kilby; editing by Shankar Ramakrishnan)