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By Paul Kilby
NEW YORK, April 23 (IFR) - Brazil’s Petrobras has eliminated a looming threat of a full rating downgrade to junk by releasing its audited results and cleared the way for this year’s first bond issues out of the country.
Brazilian corporate bonds were on a tear Thursday morning after oil company Petrobras avoided a covenant breach with the late Wednesday publication of its long-awaited audited results for 2014.
By satisfying covenant deadlines for reporting financials, Petrobras has avoided a debt acceleration that may have resulted in government intervention - a move that in itself could have impacted Brazil’s credit standing.
“The avoidance of a technical default is seen as positive in itself as that has avoided stress for the sovereign,” said an investor involved with the credit.
Petrobras’s curve tightened by up to 50bp this morning with the 2024s being quoted at 410bp, while Brazil 2025s jumped to 101.75, according to traders.
The company reported non-cash impairment cost of R$44.3bn (US$14.8bn) plus an additional R$6.19bn in corruption related losses, not to mention a jump in net leverage to 4.77x at end-2014.
“This will shift the focus to how they will right size the ship and keep leverage within a reasonable level,” said Jack Deino, head of emerging market portfolio management and senior portfolio manager at Invesco.
Those numbers shocked some equity analysts who voiced dismay at the nearly US$17bn equivalent impairment charge, which suggested the company had invested a lot more than some projects were worth.
“We have argued for a while that Petrobras has been overspending its cash flow, but we did not think it was spending cash that badly,” said equity analysts at BTG Pactual.
However, unlike equity investors who sent the company’s stock some 4% lower Thursday, the credit markets cheered, with analysts expecting more spread tightening on the horizon.
“The fact that they reported the audited results is more important than the numbers themselves,” said Klaus Spielkamp, head of fixed-income sales at Bulltick in Miami.
Barclays analysts see the potential for another 125bp spread tightening at the front end of the company’s curve as it moves forward with its divestment plans and the new management releases its business plan over the next month.
“It isn’t time to double up but spread levels are very attractive,” Deino said. “If you look at other corporates and relative value, Petrobras spreads still have some legs to tighten.”
The UK bank also expects Moody’s to upgrade Petrobras by one notch to Ba1, leading to a re-entry into several high-grade indices. The company is rated BBB- by both S&P and Fitch.
Others are less sanguine, pointing to the numerous challenges ahead for a company seeking to deleverage at a time when crude prices have suffered dramatic declines.
“I think this is more an opportunity to sell more than buy,” said a trader. “Yes they have released their numbers on time, but leverage is high and they still need to come to the market.”
Nomura analyst Alexander Monroy reckons Petrobras’s leverage is now closer to six times adjusting for debt incurred this year and said in a report Thursday that the company would need to quickly cut this level to avoid downgrades in the future.
“They may have to sell pre-sale assets, issue equity, or cut spending more than desired which may lead to lower production levels: there are no easy answers,” said Invesco’s Deino.
Still with the threat of a technical default by Petrobras now removed, the door could open to the year’s first bond deals out of Brazil, including Petrobras itself.
While the oil company says it has no need to go to the market this year after recently raising several billions of dollars through loan agreements, Petrobras could still make an opportunistic tap to cover 2016 funding needs, said observers.
“If you are looking at their spending numbers and the amount of debt they have to rollover, they will come (to the market) if they see an opportunity,” said Deino. (Reporting by Paul Kilby; Editing by Shankar Ramakrishnan)