Wednesday, 7 January 2009

Petrobras Denies Seeking $15 Billion in Loans (Do You Believe These Guys They Don't Need Money?)

Today, newspaper Estado de S. Paulo reported that Petrobras, the Brazilian state-controlled oil giant, is seeking as much as $15 billion in loans from local and international banks (click here to read the story in Portuguese. The Bloomberg version of the summary is rather incomplete.)

I talked to Petrobras CFO Almir Barbassa in May last year and he had plans to raise $4 billion from bond sales along 2009. Obviously he failed to do so because of the very challenging market conditions we endured in the second half. In the end, Petrobras might need twice as much that amount to at least ease its funding problems (the company is certainly being hard-hit by the drop in the price of oil, and the demanding state spending it has to fund.)
Estado said the loans sought would be bridge loans of maturities ranging from two to five years. Selling loans, not bonds, might be easier for a corporate giant such as Petrobras at this point. The problem is, which banks are willing to expose themselves so much to a company whose corporate governance practices have repeatedly been put a lot under question, and depends on oil for revenue? Let's remember the case of PDVSA, the Venezuelan oil company, at the start of 2007: after months of opposition-fueled rumours that the company was facing cash strains, management undertook a vast fundraising strategy (sold $7.5 billion in bonds of three different maturities, raised $3.5 billion in loans from Japanese banks and borrowed $1.25 billion in the form of a syndicated loan led by BNP Paribas.) The result ... the rumours were confirmed, the money dried up rapidly and PDVSA had problems renegotiating the Paribas loan a year later. The difference is, PDVSA did all this at a moment of abundant cash in the marketplace. Is Petrobras being careful enough in the use of its cash? Ask President Lula's Chief of Staff Dilma Rousseff.

Check the table. Cash holdings fell to a five-year low in the month of Sept. 2008 (and they probably fell even further in the fourth quarter of last year.) Reach your own conclusions. (The source for this table is the company's own Web site.)

I just talked to a couple of people who are always hearing things about Petrobras. The company is always sounding out banks. This news, therefore, shouldn't be taken as the first sign of an imminent financing package for the Rio de Janeiro-based company. But, you dear reader, can be sure that Petrobras is seeking a free-ride from Brazil's successful bond sale of yesterday. Will it work? We will see.

1 comment:

  1. Petrobras is still a great credit and we may see a bond sale in the next few days, weeks. The company does need cash, not because it doesn't generate any -- the company generates heaps of cash even with price controls on fuel -- but because the government wants it to do so many things: revive the country's shipbuilding industry, build five refineries, generate electricity to make up for hydro shortfalls, hire lots of people to help the government, finance the arts to help the governmen, develop biio fuels to placate rural constituencies, develop new offshore oil for all sorts of reasons. Never has a company been asked to do so much for a country. With the government's discretionary budget very limited, Petrobras is key to any national development and industrial plan. The smart investor might want to dump Petrobras stock and buy its bonds. With profit margins being whittled down by costs, the best way to get your hands on Petrobras cash, may be with bonds.