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Petrobras Pays Up: The High Price Of Issuing A 100 Year Bond
The scandal-surrounded, junk-rated, state-managed Brazilian oil producer Petrobras managed to successfully issue a $2.5 billion notional 100-year bond yesterday. Mainstream media is cock-a-hoop over the fact that the 'market' seemed to soak this bond up so easily and at a yield of 8.45% (which was 20-30bps below guidance) amid an order book apparently up to asround $10 billion. However, for those with some math skills, the truth is that it cost Petrobras around $380 million more than market-implied levels to successfully launch the bond (and so it should).
Petrobras is not the first to issue a Century-bond (as the following chart from Bond Vigilantes shows back in 2010)
But this was the largest recent issuance.
Rio de Janeiro, June 1st, 2015 – Petróleo Brasileiro S.A. – Petrobras announces the pricing of its 100-year Global Notes denominated in U.S Dollars (U.S.$) issued by its wholly-owned subsidiary Petrobras Global Finance B.V. (“PGF”) and unconditionally guaranteed by Petrobras. Closing is expected to occur on June 5th, 2015 and the terms of the issuance are as follows:
• Issue: 6.850% PGF Global Notes due 2115
• Amount: U.S.$ 2,500,000,000
• Coupon: 6.850%
• Interest Payment Dates: June 5th and December 5th
• Yield to Investors: 8.450%
• Maturity: June 5th, 2115
• Issue price: 81.070%
Deutsche Bank Securities Inc and J.P. Morgan Securities are the joint bookrunners for the transaction.
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However, despite the exuberance about demand in this hyper-liquidity-fueled world for a bond matures in 100 years for an energy company (think Whale Oil?), some credit market math shows that the demand was anything but voracious...
What this page from Bloomberg shows is the following: based on the default rates implied (and extrapolated) from CDS premia, the 6.85% coupon 2115 bonds just issued at a mere $81.07 had a 'fair' market price of $96.28.
In english - this means it cost Petrobras 15c on the dollar over market rates to ensure the book was filled and the $2.5bn notional sold... in other words it costs them $380 million to satisfy bond investors that their margin for safety was big enough (over and above already high spreads).
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So next time some mainstream media talking-head says how fantastic demand was, how great a signal it sends that investors scooped it up, perhaps - just perhaps - it is better to listen to someone from the credit market.
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The secret to holding this bond is to hope that you die before they default. With a 100 year bond, this is true for nearly all of us.
wouldn't be too sure with that BBB- rating (which can change quarterly)
lol @ 100-yr bond. In a 100 years, Elois and Morlocks and Elysia and Gattaca and Blade Runners and Soylence. AHH!!!
+1
Could see this 100 year bond thing spreading into the rest of the AA- or SWF backed SOE's. Particularly if yield pig pension funds need to meet that long-end crunch starting in 2017 and fixed asset investments continue on a deflation trajectory.
Hmmm, aren't those the same agencies that gave Fannie Mae and AIB a triple AAA rating before they entered bankruptcy?
I'd trust my 5 year boy to a pedophile satanist before I believe in anything S&P or Moody's had to say.
When confidence goes: it's gone.
There's ALWAYS a bigger fool when doing with OTHER people's money! The bankster/government class is all about pay me today and forget whoever gets fucked in the future.
They should diversify into the lingerie business.
No, it did NOT cost Pretrobras $380MM. Not today, anyway. And since they're going to default on it regardless, it will cost them nothing.
So long and thanks for the cash. Suckers.
Yeah, well...thanks for pretending to be an oil company anymore too.
At least the shale companies still have a capital account to tap that actually creates more product.
The interest rates Brazil is paying as a country seem to imply the country is going the way of Petrobras as well.
Haven't checked on VALE of late but that one was in the danger zone too.
Petrobras joins the "Big Ponzi" ...
Dilma you have become the opposite of what you were as young woman!
How life makes monkeys out of us!
As long as they qualify as 'collateral' they are as good as (no WAY better than) gold!
Brazil is the country of the future...and always will be
"Brazil is the country of the future...and always will be"
"O Brasil, o país do futuro e sempre será"
When I married a Brazilian 30 years ago I heard over and over how its the country of the future. During my last visit there 2 years ago I found little to nothing had changed! Same poverty, same dirt roades, same corruption.
Brazil's run by oligarchs, corrupt politicians and plenty of incompetents. Just when it looks like they're about to climb out of their age-old mess of inflation et al, everything implodes and they go back 20 years. That's what's happening at the moment.
That said, Curitiba-Paraná is a very nice city and well advanced. Just make sure to take a brolly(!)
Can't wait until Congress mandates all of our 401k's into "safe" 100 year US treasury bonds.
The Chinese will be laughing for sure.
http://mazamascience.com/OilExport/output_en/Exports_BP_2014_oil_bbl_BR_...
"Fundamentals"
Petrobras will be lucky to make it another ten years. One hundred? AhahahahahahahahaHAHAHAHAHAA!!!
I'll take 2 of those please.
This is Onion level finance.
Do they know that people are selling uncashed treasury notes on eBay which are not recognised anyore? These buyers are retard to the bone.
Not sure why Zerohedge is touting the price predicted by the model as the fair market price, and suggesting the price on the market is not the price...Was the bond was issued at x% over market rates? No, the coupon was valued at market, which was $81.07 (like for real, not for model). Are we now trusting models over market? I'm not saying that we shouldn't be, I'm just wondering why...
Very nonsensical article in my humble opinion. I'd be more interested in yield to maturity at issuance vs yield to maturity if you bought any of those 100 year bonds today (net of inflation).