The scandal-surrounded, junk-rated, state-managed Brazilian oil producer Petrobras managed to successfully issue a $2.5 billion notional 100-year bond yesterday [8]. 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 $380 million more than market-implied levels to successfully launch the bond (and so it should).
Petrobras is not the first to issue a Century-bond (as the following chart from Bond Vigilantes shows back in 2010 [9])
[10]
But this was the largest recent issuance.
Petrobras pricing details... [8]
Rio de Janeiro, June 1st, 2015 – Petróleo Brasileiro S.A. – Petrobras announces the pricing of its 100-year Global Notes denominated in U.S Dollars (U.S.$) 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...
[11]
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.
