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.

Petrobras pricing details...

 

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.