Petróleo Brasileiro S.A. commonly known as Petrobras, has long been a favourite with bond investors as they issue quite frequently, in decent size and in hard currencies, predominantly US dollars but also in euro and sterling.
The company's name translates into Brazilian Petroleum Corporation and it is 54% directly owned by the Brazilian government with a further 10% owned indirectly through Brazil's Sovereign Wealth Fund and Brazilian Development Bank. The company has total assets of around $182 billion and with reportedly $126 billion of outstanding debt it is ranked number one as the most heavily indebted company in emerging markets. Rated B1 by Moody’s, BB- by S&P and BB- by Fitch, its bonds therefore trade as non-investment grade.
As you would expect the company is involved in Integrated Oils and is split into six main business areas, the largest by revenue is refining, transportation and marketing followed by exploration and production with significant oil and energy assets in 16 countries including Africa, North America, South America, Europe and Asia.
Their issuance is usually a decent spread off from Brazilian government debt and as mentioned, in hard currencies. By way of an example, Petrobras recently tapped some existing issues such as the 7.25% bond maturing March 2044 which currently trades at a spread of +404bps off the US Treasury (UST) curve. A similar bond by the Brazilian Sovereign would be the 5% bond maturing January 2045 which trades currently at a spread of UST +265bps.
The yield curve is pretty flat for the ten months between the maturity of the two bonds and so makes little significant difference when comparing the pair although slightly miss matched in maturity. There is a difference in duration though as the lower coupon on the government issue adds 2.3 years duration which we must take note of.
As the Petrobras bond is split rated we will utilise Moody’s on both issues. Petrobras rating is B1 and the sovereign Ba2 and the difference in spread is 139bps. If we look at our ‘Relative Value Model’ (RVM) the sovereign issue fair spread for a 14 year duration is at +331bps and the Petrobras fair spread is at +454bps, so the difference is +123bps.
Therefore both bonds are trading expensive in the market against ‘Fair Value’ but the Petrobras bond spread is tighter than it should be given the duration and ratings by 16bp.
We would not buy either bond as there are other issues and issuers that offer value, such as Mexico’s Pemex, but the darling of the bond market, Petrobras, really is a Trojan horse.