When Petroleo Brasileiro SA sold 100-year bonds in June, the move was largely seen as a sign the corruption-tainted oil producer had put the worst of its problems behind it.
For investors like Pacific Investment Management Co., Fidelity Management & Research Co. and
Capital Group Inc. — the three biggest holders of the securities — that turned out to be a costly miscalculation. Since the $2.5 billion offering, the bonds have tumbled 15%. That's four times the average loss for emerging-market company debt.
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The plunge deepened last week, when the securities sank to a record-low 69.5 cents on the dollar after Petrobras, as the Brazilian company is known, had its credit rating cut to junk by Standard & Poor's. The world's most-indebted major oil producer was stripped of its investment grade by Moody's Investors Service seven months earlier as a widening probe into alleged bribes paid to former executives at the state-controlled oil company caused it to delay reporting earnings.
'PRICED TO PERFECTION'
“Everything was priced for perfection, and sadly, except for soccer players, Brazil seldom achieves perfection,” Russ Dallen, the head trader at Caracas Capital Markets, said from Miami.
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Pimco didn't respond to e-mailed requests for comment. Fidelity and Capital Group declined to comment. Petrobras didn't respond to an e-mail seeking comment on the performance of its bonds. The company has already borrowed enough to finance its projects for the medium term, it said in a statement Sept. 10.
Yields on Petrobras's 6.85% bonds, which mature in 2115, have soared 1.5 percentage points to a record 9.86% since they were issued on June 2, according to data compiled by Bloomberg.
Rio de Janeiro-based Petrobras sold the so-called century bonds — the first by a developing-nation company since 1997 — after ending a five-month delay in publishing earnings in April.
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Yet since the sale, Petrobras's struggles have only worsened as oil prices plummeted further. UBS AG cut its 2015 earnings estimates for Petrobras by 80% this month on lower oil prices and unexpected tax charges.
BRAZIL'S WOES
Brazil's own woes have also deepened, with the economy now headed for its longest recession since the Great Depression. S&P, which lowered Petrobras's rating one day after its downgrade of Brazil, signaled more cuts for the company by keeping its outlook negative.
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To trim debt, Petrobras is looking to cut $12 billion in expenses through 2019 and has started reviewing contracts for its fleet of offshore drilling rigs. Still, the 50% plummet in oil prices in the past year will make it harder for the company to raise cash by selling assets, Bank of America Corp. said in a Sept. 11 note to clients.
“Petrobras and Brazil are going to have to get used to paying more,” Caracas Capital Markets's Mr. Dallen said.
