Petrobras struggles to raise cash as shares downgraded to junk

Two weeks after Aldemir Bendine took over as chief executive officer of Petrobras, the company was downgraded to Ba2 by Moody's Investors Service on 24 February. That puts its rating at two notches below investment grade, the second downgrade in less than a month. Brazil itself is rated three steps higher, at Baa2.

The company is exploring financing options in response. It needs to sell at least US$20 billion in assets and reduce capital expenditures to approximately US$25 billion for 2015, according to a recent Bank of America report. The BofA report pointed to the potential for Petrobras to raise significant sums from its exploration and production assets if oil prices rebound.

According to Reuters, Petrobras hired financial services company JPMorgan to help sell US$3 billion in assets this year, including exploration licenses for pre-salt oil reserves, but the company denied the report.

In any event, on 2 March, Petrobras announced a more aggressive divestment program, putting the value of planned asset sales in Brazil and abroad at US$13.7 billion over 2015–16. The company expects 30 percent of the funds to come from the sale of exploration and production projects and 30 percent from the supply area, covering refineries, pipelines, terminals, and elements of the gas distribution network. Although it has not defined precisely what will be up for sale, the company did indicate that most of the assets will be related to natural gas.

The board of Petrobras has authorized the company to raise up to US$19.1 billion in fresh capital in 2015.

The company also announced plans to cut up to US$10.7 billion from its planned investment budget for 2015 in order to preserve cash and improve its status in the marketplace. With investments of US$27.5 billion originally planned for deep-sea exploration and development, the cut is a deep one.

By the end of 2014, Petrobras had debts of US$114 billion, almost five times its capacity to generate funds.

Estado do São Paulo newspaper on 26 February cited an unidentified Petrobras executive, who said that the Brazilian government has offered the company up to US$2.1 billion in loans from state banks to shore up its cash position. In light of reduced government spending, that possibility remains speculative. The Brazilian government has withdrawn its backing from a proposed local Petrobras bond, according to Bloomberg on 12 March.

The Moody's ratings cut will not only lower the company's intrinsic value but also increase its cost of capital significantly. Yield spreads on Petrobras international bonds widened in response to the cut, although they tightened again somewhat on the news of the company's two-year divestment program.

It may be a drop in the bucket, but one bright spot in the company's financial picture should be noted. On 12 March, some US$58 million of Petrobras money was repatriated by federal prosecutors from Swiss accounts held by former engineering manager Pedro Barusco, substantially exceeding the US$26 million repatriated from funds embezzled by former supplies director Paulo Roberto Costa.

Paving the way for financials

In the effort to adjust Petrobras financial statements and release them along with a report from auditing firm PricewaterhouseCoopers, an approach appears to be taking shape, according to Valor. Petrobras will reportedly make the adjustment after an impairment test, which requires the company to make two calculations of asset value.

Fair value indicates how much a third party would be willing to pay for an asset. This form of evaluation is based on market assumptions, even for discount rates and other variables. Value-in-use, on the other hand, may include synergies obtained in the operation of the asset and the company's own assumptions about the discount rate, production cost, and other variables.

After the impairment test, Petrobras will make a write-down if it can verify that the recoverable value of assets – calculated as the higher of fair value and value-in-use – is still lower than the booked value. This calculation will take some time, as it has to be made across a wide collection of assets and will entail determining the discount rate to be applied. The lower the discount percentage, the higher the current value of the asset and the lower the write-down.

The exercise has both technical and political motivation. Technically, the company must produce a well-justified adjustment of earnings by a calculation that the auditor and regulators will accept. Politically, the company must convince the public that any shortfall has been arrived at transparently, does not contradict earlier reported losses, and is not entirely explained by corruption.

Annual results must be published by 31 May at the latest, or else creditors will have the right to demand immediate repayment of the company's debts. Petrobras financial director Ivan Monteiro has been touch with the major creditors in an attempt to address their concerns.

Petrobras has created a taskforce to analyze all the testimony of those being investigated by federal police in Operation Lava Jato (Car Wash) and compare it with internal information in order to estimate the losses to be taken into account.


Infrastructure issues

PAC funding suspended

The Brazilian government has put US$11 billion in funding on hold under its Program to Accelerate Growth (PAC). PAC funds cover a wide array of infrastructure sectors, including transportation, urbanization, water and sanitation, electric power, urbanization, and housing.

An assessment is expected in July to decide whether to re-release the funds. Projects that have still not been approved for funding by that point will be cancelled.

The distribution of investment

A study released by the National Bank for Economic and Social Development (BNDES) indicates that infrastructure investment over 2015–18 should total about US$203 billion. That is more than 30 percent higher than in 2010–13, and BNDES has suggested that infrastructure bonds will be launched as a key part of fund raising.

Transportation infrastructure will received the largest proportion of investment, garnering US$80 billion over the period.

Highway projects will receive about 35 percent of that figure, urban mobility projects such as light rail and subway systems will receive about 22 percent, railways will garner 20 percent, ports 16 percent, and airports 7 percent. That represents almost twice as much rail investment as over the preceding three years.

Electric power will get US$64 billion, telecommunications US$47 billion, and social infrastructure over US$12 billion.

Water and sanitation budget

The Brazilian Ministry of Cities has established a 2015 budget of US$2.59 billion for water and sanitation works. The projects are to be implemented through the national unemployment insurance fund FTGS. Some 76 percent of the funding is tagged to the public sector. The drought-stricken southeast will receive the lion's share.

Building waterworks

The municipality of Pará de Minas, in Minas Gerais, has awarded Saneamento Ambiental Águas do Brasil (SAAB) a concession to build a water uptake and distribution system, treatment and storage facilities, and sewage collection and treatment facilities.

The 35-year concession is expected to require US$80.9 million in investment. It should raise water coverage from 95 to 100 percent within five years and wastewater service coverage from 88 to 95 percent within six years.

Stemming water loss

São Paulo governor Geraldo Alckmin is planning a public– private partnership to reduce water losses in the metropolitan region of São Paulo. The area loses approximately 19 percent of its water through damaged pipelines and water main connections and 11 percent through illegal connections, theft, and water meter failures.

The state is seeking for companies with the technological and financial capacity to carry out works such as replacing pipelines and water meters, combating illegal connections and theft, and improving leak detection capabilities.

Planning for urbanization

Marília city, in São Paulo state, is planning US$207 million in urbanization works. Some 81 percent of the total will be allotted to housing, 18 percent for water and sanitation works, and 1 percent for roadworks.

Bridge tender issued

The Brazilian Land Transportation Agency on 4 February issued an invitation to tender for the concession of the bridge connecting Rio de Janeiro and Niterói. The 30-year concession covers the operation, maintenance, monitoring, conservation, and improvement of the bridge, and the bid winner will be responsible for building road access to improve traffic on the bridge and its surroundings.

The project is estimated at approximately US$1.9 billion. The 13 km bridge was built in the early 1970s and is the longest pre-stressed concrete bridge in the southern hemisphere and among the longest bridges in the world. The current concession expires in June 2015.

Tunnel tender halted

The São Paulo state court has ordered a halt to the tender of a US$732 million contract to build an underwater tunnel between the coastal cities of Santos and Guarujá. The 900 m six-lane tunnel was initially slated for construction from 2014 to 2017.

Bidders complained that the tender rules had a number of inconsistencies and that the time provided to respond was insufficient. Andrade Gutierrez, Camargo Corrêa, Ferrovial Agroman, and Carioca Christiani-Nielsen Engenharia are among the companies that requested the tender be suspended.

The inclusion of companies that have been named in relation to Operation Lava Jato, the Petrobras bribery investigation, in three of the four bidding consortia has raised concerns that the tender process could be delayed on more than one front.

Porto do Sul gets smaller

The scope of Porto Sul, one of the largest private terminals currently planned for the Brazilian coast, is being reduced as a consequence of the dramatic drop in the price of iron ore. The decision to close the terminal, which is to be constructed near Ilhéus, Bahia, was taken jointly by the state government and the Bamin mining company.

International airport concessions

The third round of international airport concessions in Brazil could be delayed until end-2015 or later, according to Folha de São Paulo, as the country's major construction companies come within the orbit of the Operation Lava Jato investigation.

Concessions are being prepared for Salvador airport in Bahia state, Porto Alegre airport in Rio Grande do Sul, and Manaus airport in Amazonas, but many construction companies will be hard pressed to bid as they struggle with restricted access to funds to pay a total US$45 billion in debts.

The national airport authority Infraero is currently guaranteed a 49 percent share in the special purpose companies that operate airport terminals in partnership with private companies. Some analysts believe that reducing the public-sector share and permitting more companies to participate in tenders will make them more viable.

Regional airport plan

The Brazilian government's ambitious regional airport plan involves building or remodeling some 270 airports throughout the country, some 83 percent of them already operating. Nine concessions will be offered to the private sector, and the Secretariat of Civil Aviation (SAC) and Planning, Budget, and Management Ministry are carrying out studies in order to prepare tender proposals.

Civil Aviation Minister Eliseu Padilha has now said, however, that the need to obtain environmental permits may make it difficult to launch those tenders by the end of the year as planned. At President Dilma Rousseff's behest, the minister is in talks with Environment Minister Izabella Teixeira to expedite the process.

Domestic air passengers in Brazil are expected to increase from 90 million in 2013 to 122 million in 2017, making the need for airport improvements urgent and also creating a significant opportunity for aircraft manufacturers.

Port dredging

The Brazilian Special Ports Department (SEP) has announced the winners of port dredging tenders worth US$263 million in Paraná and Rio Grande do Sul states.

In Paraná, DTA Engenharia will carry out dredging and install signage at Paranaguá port. The company will prepare plans within six months and has 11 months to complete the civil works. In Rio Grande do Sul, a consortium of Jan de Nul do Brasil Dragagem and Dragabras Serviços de Dragagem will dredge Rio Grande port.

Pulling out of Oi deal

Telecom Italia announced on 20 February that it was halting its involvement in a potential deal to merge with Brazilian telecom Oi. Instead, Telecom Italia will spend €14.5 billion over the next three years to improve its mobile and fixed broadband network, some €10 billion of that in Italy.

Recently, Communications Minister Ricardo Berzoini indicated that the Brazilian government did not intend to intervene in on-going telecom consolidation in the country. Oi is one of the largest telecom providers in Brazil and has been the subject of numerous merger and acquisition rumors. Its shares have come under extreme selling pressure recently in the wake of perceived poor performance in 2014Q3, but it is still considered to have solid fundamentals.

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