Moody’s Assigns Rating to Petrobras Notes

Instant Max AI

(Moody’s Investors Service, 9.Jan.2017) – Moody’s Investors Service assigned a B2 rating to Petrobras Global Finance B.V.’s proposed global notes, which will be unconditionally guaranteed by Petroleo Brasileiro S.A. (B2 stable).

The B2 rating on the proposed notes is based on the rating of Petrobras. The proposed notes are senior unsecured and pari passu with Petrobras Global Finance B.V. and Petrobras’ other senior foreign currency debt. Proceeds from the proposed notes issuance will be used for debt refinancing and other general corporate purposes. The outlook on the ratings is stable.

RATINGS RATIONALE

Petrobras’ b3 BCA, which indicates Moody’s view of the company’s standalone credit strength, considers its high financial leverage, low to negative free cash flow, weak liquidity, local currency volatility risk and operating challenges in a difficult industry and economic environment. Consolidated free cash flow will remain under pressure in the foreseeable future as its upstream business suffers from low oil prices and downstream operations are hurt by low demand, high competition and local currency volatility, at the same time that the company’s new pricing policy for fuel is tested.

Petrobras’ b3 BCA and B2 rating are supported by the company’s solid reserve base and dominance in the Brazilian oil industry, and its importance to the Brazilian economy. Furthermore, the ratings reflect the company’s sizeable reserves at 10,515.9 Mboe, its renown technological offshore expertise and potential for continued growth in production over the long-term.

Petrobras’ B2 ratings also consider Moody’s joint-default analysis for the company as a government related issuer. Petrobras’ ratings reflect Moody’s assumption for a moderate likelihood of timely extraordinary support from the government of Brazil. Despite its stated willingness to stand behind Petrobras, Moody’s believes that the government’s current fiscal situation tempers its capacity to support Petrobras sufficiently to avoid a default. Moody’s continues to assume moderate default dependence between Petrobras and the government. Petrobras’ rating incorporates one notch of uplift between Petrobras’ BCA and its senior unsecured rating.

Petrobras’ liquidity risk has declined over 2016 on the back of $13.6 billion in asset sales and around $10 billion in exchanged notes during the third quarter last year, which helped to extend the company’s debt maturity profile. However, liquidity risk remains significant. As of September 30, 2016, Petrobras’ maturing debt in fiscal years 2017 and 2018 was $7.9 billion and $13.5 billion, respectively, for a total of $21.4 billion in the next 2 years. In addition, the class action lawsuit, the US Securities Exchange Commission (SEC)’s civil investigation and the US Department of Justice (DoJ)’s criminal investigation related to bribery and corruption will negatively affect the company’s cash position in an amount yet unclear. Other threats to Petrobras’ liquidity, as well as to its operating and financial performance, include tax contingent liabilities, execution risk related to the 2017-21 business plan and potential delays in fully executing its asset sales plan.

Petrobras’ ratings have a stable outlook, reflecting Moody’s expectation that, in the next 12 to 18 months, the company’s liquidity and overall credit profile will gradually improve, supported by managerial focus on improvements in operations and capital allocation; further debt refinancing; and additional asset sales, despite the uncertainty around the payment of fines related to the class action lawsuit as well as the SEC and DoJ investigations.

Positive rating actions could be considered if the company raises sufficient sums through asset sales or new debt arrangements to refinance its upcoming debt maturities and significantly strengthen its liquidity profile while also improving operating and financial performance. Although current low levels of capex in connection with asset sales would reduce future revenues and cash flow, actions that further strengthen the company’s liquidity but also help improve operating margins and prospects of leverage reduction are currently likely to have a greater credit impact than possible reductions in production, revenues and reserve base.

Negative actions on Petrobras’ ratings could result from deterioration in its liquidity or financial profile. Downgrades could also be prompted if negative developments from the corruption investigations or litigation against the company appear to have the potential to significantly worsen the company’s liquidity or financial profile.

Petrobras is an integrated energy company, with total assets of $247 billion as of September 30, 2016. Petrobras dominates Brazil’s oil and natural gas production, as well as downstream refining and marketing. The company also holds a significant stake in petrochemicals and a position in sugar-based ethanol production and distribution. The Brazilian government directly and indirectly owns about 46% of Petrobras’ outstanding capital stock and 60.5% of its voting shares.

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