Petrobras to Pay Most in Bond Market Since ‘03 on Oil

By Jeb Blount and Lester Pimentel

Jan. 9 (Bloomberg) -- Petroleo Brasileiro SA, owner of the Americas’ biggest oil discovery in three decades, will pay the most in the bond market in five years to finance a record investment plan after crude prices tumbled.

The state-controlled producer may tap international debt markets within days, said Gianna Bern, president of Brookshire Advisory and Research Inc., a Flossmoor, Illinois-based energy economics research firm. Petrobras will boost borrowing this year from $8.5 billion in 2008 to help fund an investment plan of about $22 billion, Credit Suisse Group AG said yesterday.

Petrobras, whose shares fell 48 percent last year, needs money to pay off $3 billion of maturing debt and fund development of the Tupi field. Its borrowing costs are rising after oil tumbled 72 percent from a July record and the credit crisis curbed demand for emerging-market debt. Petrobras’ 5.875 percent bonds due in 2018 yield 4.98 percentage points over Treasuries, more than on any bond the company sold since June 2003.

“Petrobras will probably have to pay up to tap the international debt market,” said Guilherme Sand, who helps manage about $250 million at Solidus Brokerage in Porto Alegre, Brazil. “Lower oil prices and the fact of additional financing needs make the conditions less favorable in terms of funding costs.”

The Rio de Janeiro-based company along with other state-run oil producers such as Petroleos Mexicanos and Colombia’s Ecopetrol SA probably will sell international bonds after developing nations issued $4.5 billion of debt this week, said Anne Milne, head of Latin America corporate bond research at Deutsche Bank AG in New York.

‘Think Twice’

Brazil sold $1 billion of 10-year bonds on Jan. 6 to yield 6.13 percent, or 370 basis points more than U.S. Treasuries.

Yields on Petrobras’ 5.875 percent bonds are 91 basis points above those on Brazilian government debt of similar maturity, according to data compiled by JPMorgan Chase & Co. and Bloomberg. A year ago, Petrobras bonds, which are rated one level higher than sovereign debt by Standard & Poor’s and Moody’s Investors Service, yielded nine basis points less than government notes.

Petrobras will have to sell new bonds at a yield of at least 50 basis points, or 0.5 percentage point, higher than that on its benchmark 2018 notes, Milne said. That would mean a yield of about 7.94 percent.

The company “would have to think twice before saying no to the market,” Milne said.

Shrinking Company

Petrobras said in an e-mailed statement to Bloomberg that it’s “always evaluating finance opportunities in the national and international capital and banking markets, searching for the most adequate options for the company.”

The company’s preferred shares, the most-traded class of its stock, rose as much as 1.9 percent today to 25.98 reais, the highest intraday price since Oct. 15. It was up 1 percent at 25.75 reais at 12:33 p.m. in Sao Paulo.

Petrobras is in need of financing after dropping from the world’s sixth-largest company by market value in May to 28th, according to data compiled by Bloomberg. Petrobras became a darling of investors after its discovery in November 2007 of the Tupi oil field, the largest find in the Americas since Mexico’s 1976 discovery of Cantarell.

Tupi contains an estimated 5 billion to 8 billion barrels of oil. It may be at the center of a new offshore oil province that Haroldo Lima, head of Brazil’s oil regulator, said could contain 80 billion barrels of oil, enough for more than 10 years of U.S. consumption.

Jupiter Find

In January last year, Petrobras said another find nearby, Jupiter, was probably “Tupi sized.” In September, the company said that another field near Tupi, Iara, holds 3 billion to 4 billion barrels of oil and gas. Petrobras and other oil companies may have to spend $600 billion over two decades to develop the “pre-salt” offshore reserves around Tupi, according to UBS AG.

“It is inevitable that the company will have higher refinancing needs than in 2008,” Credit Suisse analysts wrote in a report.

The cost of protecting Petrobras’ bonds from default has soared over the past year. Five-year credit-default swaps based on the company’s bonds have jumped 2.39 percentage points to 3.30 percentage points, according to CMA Datavision. That means it costs $330,000 to protect $10 million of the country’s debt from default.

Credit-default swaps are contracts that pay the buyer face value in exchange for the underlying securities or the cash equivalent should a country or company fail to adhere to its debt agreements.

Moody’s rates Petrobras Baal while S&P and Fitch Ratings rates the company BBB, the second-lowest investment-grade level. The Brazilian government has ratings of BBB- from S&P and Fitch. Moody’s rates the country Ba1, one step below investment grade.

To contact the reporter on this story: Jeb Blount in Rio de Janeiro at jblount@bloomberg.net; Lester Pimentel in New York at lpimentel1@bloomberg.net