Moody's Downgrades Petrobras Ratings -- Update
5:01p ET October 21, 2014 (Dow Jones)
By Jeffrey T. Lewis
SÃO PAULO--Moody's Investor's Service said Tuesday it downgraded Brazil's state-controlled oil company Petroleo Brasileiro SA, or Petrobras, to two levels above speculative debt based on the company's $170 billion in debt, falling oil prices and a weaker local currency.
The move could harm the re-election campaign of President Dilma Rousseff, who is locked in a dead heat with opposition candidate Aécio Neves.
The firm downgraded Petrobras' global foreign currency and local currency debt ratings to Baa2 from Baa1. Moody's maintained its negative outlook for Petrobras.
Petrobras had no immediate comment.
"The oil price can move up and down but this high leverage is not something that's easily reduced," said Nymia Almeida, a vice president at Moodys. "We believe it's going to be a very slow process of deleveraging, across several years."
Petrobras, Brazil's biggest company, is renowned for its expertise in deep water exploration and drilling. But the company has been hamstrung in recent years by what critics say is an interventionist government. In an effort to battle inflation, the government in 2011 started subsidizing the price of fuel, with Petrobras footing the bill, a move that has cost the company billions of dollars.
And while Petrobras has managed to steadily increase oil production in recent months, the fuel subsidy, couple with a weakening Brazilian real, caused Petrobras' debt to increase to $170 billion through this June, up $25 billion from December of 2013, according to Moody's.
Petrobras is also in the middle of an ambitious $220 billion spending program, and aims to be a top five oil producer by the year 2020.
The downgrade comes at a bad time for the government of Ms. Rousseff, who is locked in a tight campaign with Mr. Neves, who is widely considered the more business-friendly candidate and has vowed to improve management of Petrobras, if elected.
Pedro Fassoni Arruda, a political scientist and professor at the Pontifical Catholic University of São Paulo, doesn't think the downgrade will have much impact on voting in this Sunday's polls.
"It is unlikely that the downgrade will somehow help [Mr.] Neves," Mr. Arruda said. "For the average voter, a credit agency downgrade doesn't mean anything.
Ms. Almeida of Moody's considers the company's current level of debt too high to be fixed quickly.
"There is no signal any new government would do anything that would change this significantly in the short term," Ms. Almeida said. "The cash flow seems to be coming. It will come, but it will come in later years on our horizon."
For Frederico Mesnik, a money manager at São Paulo-based Humaitá Investimentos, the downgrade comes as no surprise.
"We expected this," he said. "The [fuel] price subsidies are hurting the company's cash. And the company is not only pressured by the gasoline prices, it is also pressured by the high investments it needs to do."
"I am sure Petrobras will need to issue new shares next year. It can't issue debt anymore," Mr. Mesnik said.
Jeffrey Lewis
and Luciana Magalhaes contributed to this article.
Write to Will Connors at william.connors@wsj.com
