Energy Here's Why Petroleo Brasileiro SA Petrobras (ADR) (NYSE:PBR) IS Buying Back $2 Billion of Debt

Here's Why Petroleo Brasileiro SA Petrobras (ADR) (NYSE:PBR) IS Buying Back $2 Billion of Debt

Published By News Desk at January 10, 2017 08:38 am Smart Stock News looks at the reasons why Petroleo Brasileiro SA Petrobras (ADR) decided to buy back nearly $2 billion of debt from the Latin American market

On January 9, Petroleo Brasileiro SA Petrobras (ADR) (NYSE:PBR) announced its entry into the Latin American bond markets. The Rio de Janeiro-based company announced its first cross-border bond for 2017. The company will raise $4 billion through a two-part debt sale. Petrobras intends to repurchase $2 billion of existing bonds either through cash or new bonds offering.

The timing of this announcement suits the most indebted energy company in the world very well. Since the US election on November 8 and Donald Trump emerging as a surprise winner, Brazilian bonds have observed a spike following the sell-off in the broader emerging market. One week after the US election, the yield on Petrobras’s 8.75% coupon bond maturing in 2026 rose to 8.3%, but it fell gradually to 7% at the end of last week.

Bankers are computing healthy premiums of 50 basis points (bps) to 75 bps on the new issue as the initial interest rate is thought to be around 6.5% for a five-year bond and 7.75% for a ten-year period bond. Petrobras is offering a healthy premium to attract investors. The company is following a similar strategy to that of Pemex. The Mexican state-owned enterprise raised $30 billion by offering high premiums to investors.

For nearly three years, Petrobras has been trying its best to recover from a corruption scandal that has sent shockwaves through the Brazilian political and business systems. Under the leadership of the new CEO Pedro Parente, the company has been trying to offload non-core assets from its portfolio and trying to lower its debt, which stood at around $128 billion.  

Although the company missed the 2015-16 asset disposal targets of $15.1 billion by around $1.5 billion, investors think that Petrobras is trying its best to get out of this hole. The primary reason for missing the asset disposal target was an injunction by the federal auditing court (TCU), which caused numerous deals to break-up. However, the energy company has bumped up the 2017-18 asset disposal plans from $19 billion to $21 billion to make up for missing the target in the previous plan.

The three prominent credit rating agencies, Standard and Poor’s (S&P), Moody’s Investor Services and Fitch’s Ratings have given a below investment ratings to Petrobras. This transaction will be led by Morgan Stanley, Itau, HSBC, Citigroup and Bradesco.