Petrobras to pay record-high yield in bond sale

Petroleo Brasileiro SA, the state-run oil producer at the centre of Brazil's biggest ever corruption scandal, is offering record-high interest rates to entice investors to its first international bond sale in a year.

Petrobras is selling $5-billion (U.S.) five-year notes to yield 8.625 per cent and $1.75-billion of 10-year notes to yield 9 per cent, according to a person familiar with the transaction who asked not to be identified because the information is private. The oil producer said it would use proceeds from the sale to buy back as much as $3-billion in notes due in 2018.

The company's stocks and bonds have rallied this year on speculation that a new government in Brazil will be better able to restore growth in Latin America's largest economy. They had tumbled since 2014 as an investigation began into kickback schemes in which Petrobras executives demanded bribes for handing out billions of dollars of work contracts. The probe has led to more than 150 arrests in Brazil and thrown the country's politics into disarray, fuelling efforts to impeach President Dilma Rousseff, who was Petrobras's chairman when the alleged graft took place.

"Investors should get into the transaction as there is positive momentum on the name and the issuer seems to be willing to give a concession," said Jorge Piedrahita, the chief executive officer at brokerage Torino Capital in New York, who said he doesn't hold the company's bonds but will look to invest in this sale.

Petrobras has $126-billion of debt outstanding, making it the most heavily indebted company in emerging markets. Yields on its $5.25-billion of existing notes due in 2021 fell 0.4 percentage point to 8.3 per cent Tuesday as of 12:41 p.m. in New York. Bonds due in 2025 from Argentina's state oil company YPF SA yield 8.12 per cent.

The proposed 9 per cent yield is still cheaper than the 9.36 per cent on the company's 2026 bonds in pounds, especially after converting the liability into dollars using the cross-currency swaps market. The pound bonds pay the equivalent of a 9.82 per cent yield in dollars.

Michel Temer, who took over as Brazil's acting president last week as Ms. Rousseff faces an impeachment trial, has been moving quickly to put in place an economic team to renew investor confidence. The change should help Petrobras recover from its current crisis and lower its borrowing costs over time, according to Klaus Spielkamp, the Miami-based head of fixed income at Bulltick.

Petrobras bonds have returned 21 per cent in 2016, compared with a 13-per-cent average for Brazilian debt and 7.5 per cent for emerging markets. The bonds lost investors 13 per cent last year.

Four months ago, the company would have had to pay much more to borrow. As recently as Jan. 21, the pound-denominated bonds yielded 13.45 per cent, and Petrobras's 2024 dollar bonds were paying 13.19 per cent.

Petrobras's debt surged during the commodities boom when it invested to develop the largest group of offshore discoveries this century while simultaneously subsidizing fuel imports and building unprofitable refinery projects. In the three years through 2013, Petrobras was the biggest borrower in Latin America, selling $31-billion of dollar bonds. It is still the biggest single issuer in Bloomberg's Emerging Market Corporate Bond Index after Petroleos Mexicanos. Then the rating downgrades started, and sales slowed.

S&P Global Ratings classified Petrobras as BBB in 2013, two levels above junk. It has cut the debt by five steps since then. Moody's Investors Service went even further, reducing Petrobras's debt nine levels from A3 in 2013. The company has scaled back production targets in recent years and is slashing investments to weather the drop in oil prices.

The current transaction will help Petrobras extend its debt curve. It has $17-billion of short-term debt, including $11-billion of bond payments coming due in the next 12 months.

"They are paying extremely high because of the current situation of the company, but they know that all this new debt will be used for a long-term plan to rescue the company," Bulltick's Mr. Spielkamp said.