24 de septiembre de 2015 / 20:39 / en 2 años

Brazil CDS at highest since crisis as sell-off deepens

NEW YORK, Sept 24 (IFR) - The gloom hanging over Brazil deepened on Thursday as the ongoing sell-off pushed the sovereign’s credit default swaps past 500bp, their highest level since the financial crisis.

Just days after many in the market thought Brazilian valuations were looking attractive, the latest bout of selling clearly unnerved even the most stoic of bond bargain-hunters.

“The narrative that Brazil is becoming cheaper: forget about it,” one investor told IFR. “This will go to lower levels.”

From the government’s failure to enact fiscal reforms to a wide-ranging scandal at state-run oil company Petrobras, the steady drip of bad news is causing investors to lose hope.

As Siobhan Morden, head of LatAm strategy at Jefferies, put it: “There is a deficit of confidence.”

Five-year credit default swaps issued against Brazil’s sovereign debt hit a peak of around 525bp at one point Thursday, before falling back to 490bp by day’s end, one broker said.

The peak marked the country’s highest CDS level since October 2008, in the wake of the collapse of Lehman Brothers, according to Thomson Reuters data.

Some say the collapse in credit prices, at least in the case of Petrobras, is due to forced selling by high-grade index investors unable to hold a company now holding two junk ratings.

Petrobras’s 2024s were trading four points lower on the day at around 67-68, while the short-end of the Petrobras bond curve was taking a particular bashing.

The company’s 2017s were spotted at 88.125, offering a yield of 12.35% compared to the high 8s just a week ago.


The sell-off is coming at a time when worries extend beyond the oil credit into the broader corporate universe.

Large conglomerates are still struggling to contend with the fallout from the Petrobras kickback scandal, which first erupted months ago.

Debt issued by Odebrecht, whose CEO was arrested in July on corruption and money laundering charges, took another knock on Thursday after a local news report said the conglomerate was preparing for a possible debt restructuring.

The 2029s issued by Odebrecht’s construction unit were being quoted at 50 cents on the dollar, marking a good 10 point drop from earlier in the week.

Negative sentiment was exacerbated Thursday when Odebrecht’s oil and gas unit confirmed that Petrobras had terminated the charter of its ODB Tay IV drilling rig.

The move constitutes an event of default on the company’s 2022 bonds, which are partially backed by the rig, said John Haugh, a LatAm credit analyst at Mizuho.

The company now has a 90-day cure period from the September 22 termination date to enter alternative charter agreements, he said.

Restructuring talk has dominated headlines in Brazil, as companies grapple with both a national economic and political crisis as well as a fall in commodity prices.

Bonds of Brazilian telecom Oi fell 10 points on Monday after a local paper said the company had hired Rothschild as an advisor to restructure its debt - something Oi denied.

Oi’s 2020 and 2022s have fallen another seven points since Monday and were spotted at 57.00-59.00 and 46.00-48.00 on Thursday.

Companies such as mall operator General Shopping are also facing liquidity pressures as the plummeting value of the Real puts strains on balance sheets thanks to mismatches between dollar debt and local currency revenues.

The Real hit a record 4.17 against the dollar before falling back to 4.01 by late Thursday after central bank head Alexandre Tombini opened the possibility of using the country’s US$371bn in foreign reserves to defend the currency.

For now, traders and investors are at a loss over when bond prices might find a bottom, though some think US high-yield and distressed buyers may eventually step in.

“Distressed guys and US high-yield investors could step in but it may take some time,” said Jorge Piedrahita, CEO of broker Torino Capital. “This will stop once forced sellers are out.” (Reporting by Paul Kilby; Editing by Shankar Ramakrishnan and Marc Carnegie)

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