NEW YORK, Sept 10 (IFR) - Brazilian credits were rebounding Thursday from earlier lows after S&P downgraded the country, which is facing its worst economic crisis in decades, to junk.
Troubled state oil giant Petrobras saw its 2024s widen 40bp-50bp on the news of the downgrade on Wednesday before tightening to 695bp-685bp.
The sovereign’s five-year CDS was trading at around 390bp Thursday morning after hitting an earlier wide of 407bp, while its benchmark 2025s were at 89.75 versus 90.75 Wednesday.
Market participants believe much of the bad news surrounding the downgrade to BB+ from BBB- was already priced in.
“There will be some forced selling from high-grade accounts,” one trader told IFR. “But they have already chopped a lot of that wood over the last few months.”
Still, Brazil is now trading wide to Russia, which already carries Ba1/BB+/BBB- ratings and whose five-year CDS was being spotted at 383bp, according to a banker.
“It is hard to make an argument that Brazil should be trading wider than Russia,” the banker said.
Many market-watchers think the other ratings agencies may soon follow S&P’s lead.
Moody’s rates Brazil a notch above junk at Baa3, but Barclays analysts reckon that a rapid deterioration in the country’s fiscal and economic conditions could mean the rating agency will soon move its outlook to negative from stable.
“We believe the risks are now skewed toward a downgrade by Moody’s early next year,” said Barclays.
Fitch still has a BBB+ rating on the credit, but its negative outlook could mean it will soon lower that to BBB- this year.
S&P kept its outlook on Brazil at negative in Wednesday’s ratings move.
“This is not a typical downgrade as it is part of a longer term evolution and it is not the last event,” said Bryan Carter, head of EM debt at Arcadian Asset Management.
S&P said the country’s credit profile had deteriorated since July 28, when it put Brazil’s outlook on negative.
This is mainly due to a “lack of cohesion” in President Dilma Rousseff’s cabinet and political uncertainty caused by the ongoing corruption scandal surrounding Petrobras.
One investor said the market’s relatively steady performance on Thursday was unlikely to last.
“There will be some short-covering, which may explain some of the resiliency we have seen on the credit side today,” the investor told IFR.
“But I think there is little market support, and I would expect Brazil to trade heavily until the end of the year.” (Reporting by Paul Kilby; Editing by Shankar Ramakrishnan and Marc Carnegie)