Petrobras better bond bet than Brasilia

January 20, 2011

By Agnes T. Crane
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Petrobras, Brazil’s energy giant, will pay bond investors a percentage point more than the government that controls it. With sovereign bond yields so low and inflation flaring up, bond-buying fanciers of this BRIC could be better off lending to its oil-backed corporate proxy.

The 10-year portion of Petrobras’ $6 billion deal is expected to price at a yield of around 5.36 percent. That’s compared with the yield on 10-year U.S. Treasuries of just under 3.5 percent. Brazil’s dollar-denominated government debt only earns about 1 percentage point more than Treasuries — still among the safest and lowest yielding investments in the world — despite being rated nine notches below top-rated U.S. debt.

Moreover, Brazil has an inflation problem. The latest reading of annual inflation, at  5.9  percent, showed consumer price increases running at a six-year high. The central bank raised interest rates by a hefty half-percentage point on Wednesday to 11.25 percent, and more hikes look to be on the way. That could weigh heavily on the value of government bonds, even those denominated in dollars, especially if investors lose confidence in Brazil’s inflation-fighting capability.

Petrobras carries its own risks: the price of oil could tumble, or it could suffer its own BP-like disaster. But if its $224 billion investment plans pan out, bondholders could be rewarded. Petrobas has its sights set on surpassing Exxon, one of four triple-A-rated companies left standing, by 2017 as the largest publicly traded producer of oil. As a majority stakeholder in the company and with its future revenue riding on the company’s success, Brasilia is sure to prioritize its energy champion’s success.

It also doesn’t hurt to have a bit of oil exposure, to capitalize on global economic growth, hedge a bit against inflation, and reduce the impact of any investment exodus from emerging markets. Strong demand for the Petrobras bond offering, the largest from an emerging market issuer over the past year, suggests some investors may be thinking the same thing.

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Chinese interest in Petrobras, already huge and widely reported, is actually bigger than widely reported. The Chinese very much intend to counter U.S. and European economic power and they need an oil company to do it.

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