Petrobras’ Sputtering Spin Cycle
Brazilian securities after a raft of grim economic data were further shaken with Moody’s two-step downgrade to junk with a negative outlook for heavyweight Petrobras despite a last-minute assurance of government backing from Finance Minister Levy who had just returned from a skeptical investor reception in New York. The agency highlighted “serious” liquidity pressure from the cascading Car Wash scandal now the subject of multiple civil and criminal investigations at home and in the US as audited financial statements may not be available until May according to the company’s latest regulatory filing. The disclosure would then be thirty days overdue and activist funds have already expressed intent to accelerate repayments with covenant breach. The demotion was also due to the “persistent” combination of high capital spending and negative free cash flow increasing leverage as production targets were unmet. The debt/EBITDA ratio will stay over 5 times over the medium term without asset sales and the new management will continue to be “distracted” from control and governance priorities, the analysis comments. Although Brasilia owns half the oil giant and two-thirds of voting shares it may not be able to cover immediate funding demand upon technical default declaration despite $350 billion in reported assets. Benchmark yields at 7.5 percent were already in the speculative zone prior to the announcement as equity value dropped one-third the past quarter. Of its $55 billion in external bonds, $35 billion is in the CEMBI Broad index as the leading 4 percent issuer. Downgrade by another rater would classify it as a “fallen angel” moving from the investment grade to high yield sub-index. US buyers have been half the base and dedicated and cross-over competition would then be alongside names like Mexico’s Cemex and Venezuela’s PDVSA.
In 2015 30 Brazilian issuers, one-third the universe have already been downgraded with the souring domestic and global economy. In February consumer confidence was at a record bottom 85 points as January’ $10 billion current account deficit was also the worst monthly reading. GDP forecasts have slipped to another year of recession as 7.5 percent inflation is above target and the real heads toward 3/dollar despite regular central bank intervention. Gross public debt/GDP is 65 percent and the fiscal adjustment promised by Minister Levy to restore the primary surplus encountered stiff objections from Workers Party members in Congress trying to distance themselves from President Rousseff’s dismal 25 percent approval rating. Higher gas prices have been allowed to aid Petrobras but subsidized lending cutbacks through the state and development banks may not materialize with the need to bolster consumers and strategic industries private rivals with still decent earnings now shun. The web of companies entangled in the Car Wash scandal has gone multinational with shippers Maersk and Keppel implicated as the alleged participants urge a “grand bargain” to settle the multi-billion dollar bribery charges in one sweeping action. They remind prosecutors that 2016 Olympics infrastructure preparation is behind schedule as sentencing may detour plans.
