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Petrobras deadline prompts some bondholders to push for default

Published 30/12/2014, 02:19
© Reuters. A view is seen of the Petrobras headquarters in Rio de Janeiro
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By Jeb Blount

RIO DE JANEIRO (Reuters) - Petrobras, Brazil's state-run oil company, could be declared in technical default on some of its foreign debt as early as Tuesday if bondholders pursue efforts to force it to speed up its assessment of losses in a giant corruption scandal.

The push, led by New York-based Aurelius Capital, applies to $54 billion of Petrobras bonds governed by U.S. law in New York state. Aurelius, a "distressed debt" fund, is asking investors to put the company into default as "a precautionary step," according to a Dec. 29 letter from the firm reviewed by Reuters.

Under the terms of those bonds, Petrobras is required to provide third-quarter financial statements within 90 days of the end of a quarter, in this case by Monday, Dec. 29. Petrobras has not published those accounts because allegations of contract-fixing and bribery at the company have raised doubts about the true value of its assets.

For the default declaration to take effect on any of the more than 20 U.S. law bonds outstanding, investors holding at least 25 percent of any one series must request the action, Aurelius said in the letter to fellow bondholders.

Aurelius was a leading member of a group of investors that refused to accept a debt restructuring with Argentina, taking the country to court.

Petrobras, which first planned to release results in early November, has extended the deadline to Jan. 31 as new corruption allegations came to light, saying it had a waiver from investors but not giving any details. A January release of unaudited results will meet obligations to creditors and prevent a forced early repayment of debt, Petrobras said in a statement Monday.

"We believe bondholders should immediately take the prudent precaution of giving formal notice of default," Aurelius managing director Eleanor Chan wrote. "While mere notice of default should not itself cause a crisis, bondholders cannot avoid a crisis merely by sticking their heads in the sand and accepting Petrobras' assurances as a certainty."

Distressed debt funds specialise in buying the debt of companies or countries at risk of default. Such hedge funds, also known as "vulture" funds, often use top flight lawyers to gain favourable terms in any bankruptcy.

Few have suggested Petrobras will be unable to pay its debts in the short or medium term. It has huge oil resources and the backing of the Brazilian government, whose officials have said they will backstop the company.

Petrobras, though, is already frozen out of capital markets because of the scandal and is in danger of losing its investment-grade debt rating, a situation that would reduce the pool of potential investors and raise its borrowing costs.

A notice of default will require Petrobras to provide financial statements by early March or face calls for early repayment of debt.

Even if matters do not reach that stage, the declaration will increase pressure on Petrobras executives to negotiate with bondholders and provide a credible accounting of the costs of the corruption scandal, a reckoning that Petrobras' chief executive said could take months.

"If Petrobras releases its third-quarter financial statements by the beginning of March, the default will be cured," Aurelius said. "If Petrobras still has not released its third-quarter financials by early March, the underlying causes of the delay may be considerably worse than is understood today."

© Reuters. A view is seen of the Petrobras headquarters in Rio de Janeiro

Petrobras also said Monday that it is revising planned investments of more than $40 billion for 2015 based on a average exchange rate of 2.60 Brazilian reais to the dollar and an average price of benchmark Brent crude oil of $70 a barrel.

(Reporting by Jeb Blount; Editing by Chizu Nomiyama, Steve Orlofsky and Cynthia Osterman)

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