Petrobras $4 billion bond issue Brazil's largest since 2000

Petrobras $4 billion bond issue Brazil's largest since 2000 - MarketWatch
Oct. 24, 2009, 10:19 a.m. EDT

By Riva Froymovich

NEW YORK (MarketWatch) -- Brazilian state-run energy company Petroleo Brasileiro S.A., or Petrobras, sold a total of $4 billion in bonds Friday in two parts, the largest debt sale out of Brazil since the start of this decade.

Massive interest in the issue comes despite a new Brazilian tax law announced Monday, which levies a 2% tax on foreign investment in local equities and fixed-income assets in order to slow appreciation in the real against the dollar.

'That has not filtered into the appetite for Brazilian risk,' said Enrique Alvarez, head of Latin America fixed-income research at IDEAglobal in New York.

Alvarez noted that outstanding debt on Brazil's reference 2040 bond is $4 billion, equal to the combined size of the Petrobras deal.

This is just another sign that, despite the slew of fresh issuance out of emerging markets this year, appetite remains healthy following a glut during the height of the financial crisis. Debt out of Brazil is all the more attractive now, after Moody's Investors Service upgraded Brazil to investment-grade last month, more than a year after Standard & Poor's and Fitch Rating did the same.

Brazilian companies can now take advantage of this status, particularly companies with the implicit backing of the state, such as Petrobras, to issue longer-dated maturities.

Petrobras sold $2.5 billion in 10-year notes Friday at 238.5 basis points over Treasurys to yield 5.875%. It sold $1.5 billion in 30-year notes at 270.6 basis points over Treasurys to yield 7.0%--and it could have sold more.

The ratings on the bonds were Baa1 by Moody's Investors Service, BBB- by Standard & Poor's and BBB by Fitch Ratings.

Both offerings were oversubscribed. Demand for the 10-year notes came in at about $7.5 billion and $4 billion for the 30-year notes.

This is the largest-ever bond issue for a Brazilian company, breaking the title held by giant miner Companhia Vale do Rio Doce (RIO), which sold $3.75 billion in November 2006. It is the second-largest issue for any Latin American company, after Venezuelan PdVSA’s $7.5 billion multi-tranche bond sale in 2007.

But, as a quasi-sovereign firm, analysts say it would be fairer to compare the size of this issue to Brazilian sovereign debt. And still, this is one for the record books. It marks the largest bond sale since Brazil's 2000 issuance of more than $5 billion in debt.

Most investors came from the U.S--about 65% of demand for the 10-year note and 80% for the 30-year bonds. European investors made up 65% of the bids for the shorter-dated bonds, and 13% for the longer-dated ones. Asia bid for about $500 million in the 10-years and asked for about 7% of the 30-years.

Petrobras' attraction now is also tied to their recent discovery of a large offshore light-oil reserves in the subsalt layer off the coast of the southeastern state of Espirito Santo.

'This find is playing a big role in such a large and successful offering,' said Alvarez. 'Knowing that Petrobras is going to need more financing going forward...you can expect subsequent amounts years out.'

The success of this issue is evidence that gaining additional sources of revenue through new debt won't be a problem, he said, as long as oil prices remain near normal historical rice levels.

Earlier this week, Petrobras said that it planned to issue the bond in an effort to pay down a $6.5 billion bridge loan it received earlier this year.

The bonds were issued through the company's international subsidiary, Petrobras International Finance Company, or Pifco.

The company has accessed the international debt market two times so far this year. In February, the company raised $1.5 billion with a 10-year overseas bond issue. In June, Petrobras raised $1.25 billion with paper of the same maturity.

The risk premium on Brazilian debt strengthened Friday on JPMorgan's Emerging Markets Bond Index Global. It was three basis points tighter at 219 basis points over Treasurys. However, the return on the index was down 0.45% amid this new supply. Brazil's benchmark bond, the Global 2040, lost 1 3/8 to 133 bid, according to Reuters.

The overall Embig was nine basis points tighter at 309 basis points over Treasurys in late afternoon trading. The index lost 0.17% on the day."