Across-the-Board Issuing

João Nogueira Batista was an investment banker until a few months ago. Now he is on the other side of the fence, working as the chief financial officer of Brazil’s biggest company, Petrobras. Although the federal government is Petrobras’s controlling shareholder, with 56% of its voting stock, the company operates much like a private-sector company. It must make a profit and has to raise finance in the capital markets.

Nogueira, formerly a senior executive at Dresdner Kleinwort Wasserstein in Rio de Janeiro, says Petrobras intends to invest $31.7 billion through 2005. “Ninety-three percent of the program will come from debt and cash flow, and 7% from project finance deals,” he says. “It is the opposite of what we were doing before. The plan is to become a frequent issuer, to be more international and diversify our markets, [to issue] not just in dollars and in euros but in yen too.”

Ultimately, Nogueira wants investors to see Petrobras as something approaching a conventional oil company. His dream is that, “As the market becomes normalized and Petrobras risk declines, we will get an investment-grade rating.” He says, “Petrobras has a good name, but it has been away from the markets for a long time.”

Market Rapprochement
Petrobras began its rapprochement with the global capital markets in August 2000 when the government sold $4.34 billion in equity. “Petrobras has got 30 equity analysts following it now and that gives you a bridge to the debt capital markets,” says Nogueira. Although Moody’s grades Petrobras Ba1, above Brazil’s B1 sovereign ceiling, it is still a junk bond rating and investors are demanding as much credit enhancement as they can get. Last year, the company issued the first of several bonds with political risk insurance, followed in December and January with more bonds backed with export receivables and wrapped with political risk insurance.

“The plan is to do three or four operations in the capital markets with yield curves in dollars, yen and euros,” says Nogueira, “and the idea is to become a frequent issuer of plain vanilla bonds.” That will probably take a considerable time.

Project finance will continue to be an important, but not dominant, source of funding. But Nogueira wants future deals to be more attractive for Petrobras. Project finance deals have traditionally had full recourse to Petrobras. He wants to start doing traditional, non-recourse project financing.

Nogueira says, “International expansion is part of our strategy. There will be no big M&A deals but we will gradually go on diversifying. We will continue in key areas – upstream in west African coast, the Gulf of Mexico and in South America in upstream and downstream ventures.” Nearly a quarter of the company’s investment budget is earmarked for foreign markets. The Gulf of Mexico is particularly attractive, because it would allow Petrobras to make the most of its advanced deep-sea drilling techniques and increase its exposure to the US market.

Safety Issues
While the company is good at growing its operations, its poor environmental and safety record has damaged its image and prestige in the financial markets. The most damaging incident occurred last year when the company’s mammoth P-36 oil rig sunk off the coast of Rio de Janeiro killing 11 people and costing the company hundreds of millions of dollars. Some US institutional investors are wary of investing in a company with such a questionable record, fearful of a future public relations disaster or the prospect of damaging legal claims. Others say a poor environmental record suggests there are deeper management problems at Petrobras.

Nogueira retorts, “We have accepted the blame for accidents and have not tried to evade our responsibilities. There is a [commitment to] preserving the environment as a basic value. There is a health, safety and environment project of $1.5 billion underway that has been in operation for two years.” He says Petrobras engineers have checked the entire pipeline network and all the company’s environmental policies are ISO certified. PricewaterhouseCoopers, the auditors, monitors the health, safety and environment program twice a year.