Friday, 6 February 2009

Petrobras, The Bond Issue and Some Credit Metric Issues -- The Fitch Version

Petrobras headquarters in Rio de Janeiro.
The ugliest company building I have ever seen

Petroleo Brasileiro SA, the pride of state-controlled companies in corporate Brazil, sold $1.5 billion of ten-year bonds this week. Fitch Ratings said today that Petrobras, being a net volume exporter, has a healthy generation of foreign currency cash flow. While Fitch recognizes the positive credit effect of the market-oriented measures implemented over the past several years as well as improvements in corporate governance, there are some concerns. Let's list them ...

-- Among factors that may hinder company ratings and credit metrics are Petrobras' vulnerability to fluctuations in oil prices, exposure to local political interference, currency risk, domestic market revenue concentration and significant medium-term capital-investment requirements linked to the company's ambitious strategic plan.

-- Ratings may be revised if the combination of government control, which underscores the ability to influence corporate strategy and long-term policy decisions, and a domestic market focus, continues to affect operations.

-- Petrobras recently unveiled its $174.4 billion 2009-2013 investment budget, which includes for the first time funds for its pre-salt area in the Santos basin. This investment plan is 55 percent higher than the previous $112.4 billion five year plan released last year. In spite of the $12 billion funds available through state-development bank BNDES, Fitch believes that Petrobras' $29 billion capital expenditure for 2009 may be curtailed given the plunge in oil prices and increasing cost of capital.

-- Having said that, Fitch expects credit metrics to deteriorate; they will remain consistent with the company's ratings, though. The expected drop in hydrocarbon royalty and tax payments will allow Petrobras to still generate sufficient cash flows despite the drop in prices.

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