Weekly Credit Risk Monitor /

Weekly Credit Risk Monitor

    Stuart Culverhouse
    Stuart Culverhouse

    Head of Sovereign & Fixed Income Research

    Tellimer Research
    8 August 2019
    Published by

    In Focus: Petrobras Initiation – Operational and financial strength, with a positive business outlook

    We initiate coverage of Petroleos Brasileiros or Petrobras’ family of bonds with a Buy recommendation (ticker: PETBRA). While this might seem counter-intuitive on a relative value basis, considering that PETBRA bonds are trading tighter than higher-rated peer PEMEX, we base our recommendation on the trend. We expect Petrobras to continue to improve, strengthen its balance sheet further and carry on increasing production, which should be rewarded by investors with higher bond prices. 

    On the other side of the coin, we continue to see a deteriorating PEMEX with a dubious business plan, the need for more government support, and continued challenges on the production and margins fronts. We believe that the qualitative differences between these two credits justify our view that PETBRA bonds have more upside potential, while PEMEX bonds (Hold) remain riskier and vulnerable to potential events such as further downgrades and deteriorating performance. 

    We believe that if PEMEX were to lose its investment-grade status from another agency, the forced selling of those bonds (from what we call ‘downgrade holdouts’) would probably result in investment flows into Petrobras that could make spreads even tighter.  

    Within the whole PETBRA family of bonds we particularly like the US$4.719bn (originally issued amount was US$5.40bn), 5.999% Senior Unsecured bonds due 2028 (Ba2/BB-/BB-) currently trading at cUS$109.443 (ALLQ) to yield 4.64% (G-Spread 292 bps; Z-Spread 302 bps), because these bonds are among the most liquid within the company’s credit curve and its intermediate maturity and duration (6.8 years) in the current environment of falling rates. 

    We also particularly like the company’s US$2.623bn (out of an originally issued amount of US$2.75bn), 5.75% Senior Unsecured bonds due 2029 (Ba2/BB-BB-) currently trading at cUS$107.666 (ALLQ) to yield c4.73% (G-Spread 299 bps; Z-Spread 310 bps) and duration of 7.5 years. We like these bonds for the same reason as the 2028s: high liquidity, intermediate maturity and duration, and what we believe is an adequate return that could tighten further as the company continues to improve its balance sheet and operations. 

    With the Lava Jato scandal mostly behind us, the company has refocused on increasing production, increasing its liability management actions, strengthening its balance sheet, and improving its governance. These factors, coupled with what we believe has been an increase in appetite for PETBRA – at least to some extent a factor of the problems at its comparable PEMEX – have resulted in substantial price appreciation and spread compression for PETBRA bonds. However, we believe that an additional set of asset sales, lower capex needs and further cost efficiencies still leave room for additional positive price action. 

    PETBRA reported stable Q2 19 results. Petrobras expects further increases in production that should result in strong quarters ahead and set the stage for a positive ratings action towards the end of the year, something we believe is long overdue.

    Read the full report here

    Recap of the week’s key credit developments

    China (CHINA): On Monday, Chinese authorities devalued the Yuan (CNY) by c1.6% to 7.0508 (from 6.9405), in the latest friction between the US and China. The move suggests that China is not optimistic about resolving the ongoing trade war between the two countries. Relations may have worsened still, after the US Treasury Department officially labelled China a currency manipulator. China has rejected this and officially stopped buying US agricultural products. Although there may be opportunities for other exporting nations, we maintain our view that the trade war is negative for all frontier and small emerging markets. 

    Venezuela (VENZ): On Monday, US President Donald Trump imposed additional sanctions on the government of Venezuela’s President Nicolas Maduro, which prevents Venezuelan government property in the US from being transferred, paid, exported, withdrawn or otherwise dealt in, according to Trump’s executive order. Venezuelan citizens thought to have assisted Maduro are also blocked from entry to the US. The move comes ahead of a US$842mn principal payment on the collateralised PDVSA ‘20s in October. The bond, the only one on which Venezuela/PDVSA is still current, is collateralised by a 50.1% share in Citgo Holding. Russia’s Rosneft also holds a 49.9% stake in Citgo as collateral for a loan it granted to the Venezuela government in 2016. 

    Genel (GENLLN): The company reported upbeat H1 19 financial results underpinned by production growth. The company continued to generate strong free cash flow with additional crude volumes compensating for softer prices, higher capex and newly introduced dividends. Genel’s operations remain self-funding due to the beneficial terms of the production sharing contacts, the receivable settlement agreement (RSA) and high quality of reserves. With a free cash flow (FCF) breakeven price of cUS$41/bbl, according to our estimates, Genel is both highly cash generative and resilient to oil price volatility. Low leverage and accumulated sizable cash reserves sufficient to repay all outstanding debt at once offer financial flexibility in terms of investments, dividends and debt management. We reiterate our Buy recommendation on GENLLN 22s.