January 9, 2017 / 1:29 PM / 7 months ago

UPDATE 3-Brazil's Petrobras breaks drought in LatAm market

(Adds investor comments)

By Paul Kilby

NEW YORK, Jan 9 (IFR) - Brazil's Petrobras opened the Latin American primary markets on Monday with a US$4bn two-part debt sale - the region's first cross-border bond of the year.

Proceeds are going to finance an up to US$2bn tender as part of the debt-laden company's efforts to term out upcoming maturities.

Timing was seen as opportune given how much Brazilian bonds have rallied since the broader EM sell-off following Donald Trump's surprise victory in the US presidential elections on November 8.

"They couldn't have picked a better time," said Ricardo Navarro, a portfolio manager at asset management firm Noctua. "We are probably near pre-Trump levels."

After spiking to around 8.3% during the week following the US election, the yield on Petrobras's 8.75% 2026s has steadily dropped to hit the low 7% mark last week.

At initial price thoughts of 6.5% area on the five-year and 7.75% area on the 10, bankers were calculating attractive new issue premiums of anywhere between 50bp and 75bp.

That calculation depended in part on how much weight was given to the high dollar price on the existing 8.375% 2021s and 8.75% 2026s, which according to one banker were trading last week around 109 and 110.50, or yields of 5.95% and 7.18%.

"The dollar price is worth something but not worth 25bp," said one, arguing that investors like Petrobras bonds for their high liquidity.

"Liquidity means more than the high dollar price."

But other market participants disagreed.

"I would say that fair value is close to 5.75% on the five year," another banker said. "The high dollar price matters a lot for this."

Either way, Petrobras started with a generous premium to get investors on board, much as Mexican state-controlled oil company Pemex did in December, when it amassed an over US$30bn order book after initially offering lavish NICs.

"Petrobras isn't in a position these days where it can skin every last basis point on their deals," said the first banker.

Even so, an over US$20bn book allowed leads to squeeze pricing 37.5bp from IPTs before launching a US$2bn five-year to yield 6.125% and a US$2bn 10-year at 7.375%.

"They ratcheted in pricing quite a bit," said Jason Trujillo, a senior analyst at Invesco.

"Clearly there is a lot of demand for (Petrobras)...Brazil still has value but broadly in EM it is hard to get excited about valuations."

The company has been struggling to regain its footing following a corruption scandal that has had a broad impact on Brazil's political and business classes.

New management has been shedding assets and undergoing liability management exercise in an effort to deleverage and improve the company's credit standing.

While Petrobras fell short of its 2015-2016 divestment target to raise US$15.1bn, investors largely feel the company is heading in the right direction, and it is still seen as cheap to the sovereign.

In the tender, Petrobras is targeting US dollar-denominated 3% 2019s, floating-rate 2019s, 7.875% 2019s, 5.75% 2020s, 4.875% 2020s and floating-rate 2020s.

If holders tender by the early bird date of January 23, they will receive a purchase price of 100.625, 101.625, 110.50, 104.875, 102.75 and 101.625, respectively.

Petrobras is also offering to buy back euro-denominated 3.25% 2019s at 105.125 if holders tender by the early bird date.

Bradesco, Citigroup, HSBC, Itau and Morgan Stanley are acting as leads. Expected ratings on the SEC-registered notes are B2/B+ (stable/negative). (Reporting by Paul Kilby; Editing by Marc Carnegie and Shankar Ramakrishnan)

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