LatinFinance - March/April 2015 - 38

BRAZIL
PETROBRAS

The corruption scandal at Latin America's biggest debt issuer
has shaken regional capital markets, and its limits are still not clear.
By Thierry Ogier

Picking up the pieces

38 L ATINFINA NCE.COM - March/April 2015

©REUTERS

A

n eerie quiet
has settled over Brazilian issuance in the
Eurobond markets, with not one borrower
from the country selling debt in December
and January.
"Investors know how to look at sovereign
and corporate credit risk, but how do
you price this scandal?" asks one senior
DCM banker in New York pointing to the
avalanche of disclosures that has sidelined
not just Petrobras, but threatens to take
down creditors, suppliers, and bankers as
well. "People don't know what companies
are and aren't linked to Petrobras. They
don't know how far the scandal can go."
Ramifications of the Petrobras scandal
continue to roil Latin America's largest
nation. At broader risk are Brazil's capital
markets and construction activity.
Indeed, as investors turn skittish and
credit agencies slap downgrades on
Brazilian debt, the whole economy must
deal with the impact of this "painful" affair,
as Maria das Graças Foster, the company's
former chief executive, termed it late last
year.
Claims over the past year include
commissions of up to 3% on contracts
involving more than $20 billion, with
funds siphoned off to political parties and
individuals. "The payment of kickbacks
in large contracts... was endemic and
commonplace in the supply, services, and
international directorates," the federal
prosecutor's office has said as part of
its investigations into Petrobras. Those
directorates were firmly in the hands of the

CHALLENGE AHEAD: Petrobras's new
chief executive Aldemir Bendine

Workers' Party, in power since 2003,
although the prosecutors allege other
parties benefitted, too.
The scandal shows how ill-suited
state-owned resource companies are for
technically complex projects, and how
prone they are to graft, says Daniel Freifeld,
founder and principal of emerging markets
specialist Callaway Capital Management.
The recent decline in oil prices exacerbates
the situation. "There was some confusion
about it at the peak of the commodities
boom, but [Petrobras] is showing how
GRAHAM STOCK
BLUEBAY ASSET MANAGEMENT

"INVESTMENT IS
CLEARLY BEING
DEPRESSED BY THE
REVELATIONS"

brittle these companies are," he says.
In the first weeks of 2015, it remained
difficult to gauge the sheer depth of the
Petrobras crisis, even after the company
issued an unaudited balance sheet for
its third quarter results in late January.
The report had been delayed since midNovember when the external auditor,
PricewaterhouseCoopers, refused to
sign off.
Even after releasing the results, Foster
admitted it was "impracticable" to put a
reliable figure on asset depreciation due to
graft. Still, the company's initial estimates
assumed overpayments at around 61
billion reais ($23 billion), or about 10% of
Petrobras' fixed assets.
Battered and bruised
For Petrobras itself, once the flagship of
natural resource nationalism in Brazil
with 86,000 staff, the scandal has had a
devastating effect.
The company has lost some 80% of
market value since its 2008 peak, and its
worth fell 40% in the final weeks of 2014
alone. Numerous class actions have been
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