Moody's Downgrades Petrobras' Rating

10/22/2014 - 10h29

Five days ahead of the presidential election, the rating agency Moody's decided to reduce Petrobras' rating, the Brazil's largest state-owned company.

The rating measures the ability of a company to pay its debts and serves as a guide for investors.

Although rating agencies have made some mistakes during the 2008 global crisis, lower grades, given by the agency, tend to keep investors away and bring down stock prices.

In a statement, Petrobras said investment rating - which means a good payer designation- was kept the same for the state-owned company.

Petrobras' was downgraded from Baa1 to Baa2, considered average, and a negative outlook was placed (a new downgrade could occur).

In order to lose the investment rating, the company needed to lose two more grades: Baa2 and Baa3.

The reason for the downgrade was the high debt of the state-owned company which makes it more difficult to manage with the drop in oil prices.

For the agency, Petrobras' ability to honor its debt has worsened in recent weeks, after the oil dropped, the lowest in four years.

Petrobras' downgrade was announced after Stock Market closing and it should only impact the markets on Wednesday (22).

On Tuesday (21), preferred shares (without vote) had already retreated 6.92% to US$7.5. Ordinary papers (with vote) fell 5.43% to US$7.3.

The drop was attributed to the numerical advantage of President Dilma Rousseff (52%) over her opponent Aécio Neves (48%) in Datafolha's survey released on Monday (20).

Moody's said that only "well after" 2016, Petrobras will be able to reduce its debt, which contradicts the original expectations of the agency.

Petrobras' net debt is at US$ 108billion –growing US$9 billion in three months.

The company has an estimated 40% leverage - meaning that it uses 40% of the debt relative to its equity, own capital – while 35% is the recommended for investment grade.

The relationship between debt and EBITDA, an important measure of debt (showing how many years the company has to work to generate cash to cover its debt), increased from 3.52 to 3.94 in just six months.

The goal was to have 2.5 until 2015.

The greatest difficulty in reducing debt is the huge investment plan ($44 billion per year) and the delay price, which now no longer exists.The delay costed US$26 billion over the past three years, according to brokerage firm Gradual.

On Tuesday (21), the Brent crude oil closed at US$86.23 a barrel, up 0.97% during the day; during the year, however, the fall is 22.5%. The real has lost 4.7% in value in the year so far.

In Brazil, it is said that pre-salt oil exploration is not feasible with the commodity below US$80.

Translated by SIMONE PALMA

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