LatinFinance - March/April 2014 - 47

Barbassa explains the decline in equity
value by pointing out that "output has
remained stable in the past three years;
currency depreciation has offset the impact
of price corrections during this period; and,
the performance of the global economy has
deterred investors from emerging market
countries.
"Petrobras is now working hard to
increase its production and to align
its domestic prices to those on the
international market in the medium term,
so we can recover part of its market value."
Lightening the load
at the end of last year, the board of
Petrobras, chaired by Brazil's finance
minister Guido mantega, approved a new
pricing policy for gasoline and diesel, but
the formula remains secret.
Yet Petrobras is overburdened: it
is required by law to invest dozens of
billions of dollars to develop the pre-salt
oil fields (it has a mandatory minimum
stake of 30% in those ultra-deep water
fields - the librafield, for example, which
was auctioned last year, is 40% owned by
Petrobras).
its net debt is already more than three
times ebitda, against an official target of 2.5.
Barbassa stresses that the problem will

be solved: "Debt and leverage indicators
must also return to the limits that were
specified in the 2013-2017 business and
management plan, within 24 months,"
he says.
the company still has to raise $12.1
billion per year from the capital markets,
according to its latest five-year investment
plan.
"they have a huge capex; they have
often said they are investing $220 million
per day," says Rodrigo fittipaldi, debt
capital markets director at BnP Paribas,
which helped coordinate a $5.17 billion
equivalent bond issue in euros and
sterling at the beginning of January.
"this was the largest issue by an
emerging market company in europe in
history," says Barbassa. "taking it from
there, it is possible to have one more issue
in dollars this year."
in spite of the deal's apparent success,
however, spreads have reflected the new
market reality. Petrobras' five-year dollar
cDS spread over US treasuries widened
from 180 basis points in may 2013 to 270
basis points this January and was trading
at around 280 basis points in february.
"fixed income investors are well aware
of Petrobras' debt burden. But they are
buying it," says BnP Paribas' fittipaldi. "is

there any concern? Sure, there is, but it has
already been priced in.
"there is enough liquidity on the
secondary market to incorporate the
change in Petrobras' risk profile. the
spreads already reflect the new reality. But
in the long term, Petrobras continues to be
a great credit story."
Denis Demange, a senior banker at
crédit agricole in São Paulo, says: "there
is a financial risk, but it is mainly a matter
of time. Sooner or later, the oil will come
out and the cash flow will improve. the big
issue is whether this will start in 2015, 2016
or later. this is the key concern.
Demange says the danger is that
if production fails to increase, and if
consumption rises, Petrobras will have
to import more fuel. "as president
Dilma Rousseff does not want to align
domestic prices to international prices,
the company suffers huge losses there,"
he says.
Partly as a result, Petrobras risk is
closely correlated to Brazil's sovereign risk.
So any market sanction against Brazilian
fiscal policy would also hit the company.
Given the wider financial troubles facing
the Brazilian state, Barbassa's mission
to keep investors happy looks set to be a
tough one - at least in the short term. LF

March/April 2014 - l atinfina nce.com 47
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