The Petrobras corruption scandal has effectively closed the international capital markets to all Brazilian issuers, with bankers frustrated that the quasi-sovereign oil company is preventing companies from taking advantage of a positive bounce following the announcement of Joaquim Levy as the new Minister of Finance.
Petrobras’ failure to publish an audited 3Q 2014 report has added to the volatility effecting Brazilian issuers. Three companies – Cosan, JBS and Marfrig – aborted international bond deals at the end of 2014 and bankers say any issuance before Petrobras has resolved its accounting issue is highly improbable. The company’s auditors of three years – PricewaterhouseCoopers – is refusing to sign-off on the accounts. Petrobras, which reportedly has enough cash for about six months (and according to local sources has stopped paying nearly all suppliers – which is causing knock-on problems in the large supply chain) has been issuing up to $15 billion annually in the international markets. Not only will this source of finance be unavailable without audited accounts but the scandal has led to a Brazilian premium to other issuers that makes such deals unattractive for potential issuers. “It’s a perfect storm for Brazilian companies,” says one local DCM banker. “Petrobras added to the volatility that was coming from falling oil prices, the European recovery and US interest rates.”
Bankers say Petrobras will have to come to some arrangement with PwC to sign-off on the accounts, albeit probably incorporating disclaimers that the numbers are liable to change. It is understood that Petrobras will be in default on many of its outstanding international bonds (valued at about $125 billion) if it publishes unaudited accounts. Given this contractual clause, it will also be a legally questionable if the company is in technical default should the accounts be accompanied with any significant disclaimers. There have been rumours in the market that the oil company could issue asset-backed bonds in either the local or international market – collateralized with $3.4 billion owed to Petrobras by Electrobras – but sources close to the company told Euromoney that it was more likely to be given a bank loan, backed by state guarantees, along the lines of the $4.8 billion loan made to the electricity distribution companies by the state’s electricity clearing company, the CCEE, in April 2014.
However, some see causes for optimism: Leandro Miranda, managing director and head of fixed income at Bradesco BBI, acknowledges that Brazilian companies will have to wait until Petrobras publishes its accounts but says that Brazilian companies are still in a strong position. “There is only about $12 billion of refinancing requirements in 2015 and the local markets now have huge liquidity and attractive rates of financing so there won’t be a need for Brazilian companies to issue at any price that reflects an added ‘Brazil risk’ premium,” says Miranda. “Emerging market funds are still seeing inflows – the crossover from US high yield continues – and so there will be a scarcity of supply. Brazil is still a significant proportion of the EM portfolio so we expect that [the market] will rebalance again.”
With Petrobras and Brazil making up such a large proportion of total DCM issuance, the first quarter of 2015 is likely to see a relatively low level of deals for Latin America. Colombia and Mexico both have significant capex requirements and the falling oil price will probably be adding to bond requirements but the activity won’t compensate for the Brazilian absence. However, the lack of supply will create favourable conditions for those that do tap the markets. In early December the Republic of Chile emphasized the strong demand for quality Latin American credits when it issued a total of $2 billion in dollar- and euro-denominated bonds. Katia Bouazza, head of Latin America capital Finance at HSBC in New York, said the transaction was done in very different circumstances to Chile’s deals in 2010-2012, when demand from China was strong and the copper price was higher: “But the fact that it was still a very successful deal – and both the US and European tranches got very strong receptions– is a very strong vote of confidence for Chile and gives a good indication of the international markets’ appetite for bonds from Chilean companies in 2015.”
Bouazza says the European tranche was, in effect, a debut because the sovereign of Chile’s last Euro-denominated transaction matured in 2003 and the market has changed significantly since then. “So to see this tranche price inside similarly-rated EM credits like South Korea – speaks to the credit’s fundamentals, as well as the timing of the deal,” Says Bouazza. “Chile paid less than 5bps of new issue premium on the US portion which is a very low level and we haven’t seen that kind of minimal new issue premium from other Latin American issuers in the market recently. My view is that this deal sets the tone for other Chilean issuers – both quasi-sovereigns and those from the private sector – when they may come to market later next year.”