Remember June - when everything was (apparently) awesome in BRIC-land and somehow a large group of duration-seeking greater-fools used Other-People's-Money to buy Petrobras bonds that mature in 100 years! Well those bonds are now trading less than 70c on the dollar (with yields pushing 10%) as Brazil's state-run oil company Petrobras, which slashed its five-year spending plan by 40% in June, admits that plan is already obsolete (two company sources told Reuters on Thursday). Petrobras will likely cut back further as growing debt costs, falling oil prices and a weak currency are the perfect storm for the company.
Still "money good"? Only another 99.75 yearsd to hold them on your balance sheet to find out...
The sources said the downgrade will raise the cost of refinancing Petrobras' more than $130 billion of debt and reduce the capital available to drill wells, build production ships and refineries and pay for infrastructure to boost output and revenue.
"The June plan is already obsolete, its outlook for oil prices, debt costs and the currency are no longer realistic. The plan will have to be changed," one of the sources said.
In a statement released late on Thursday, Petrobras said its project financing was sound in the medium term and is not affected by a downgrade in credit risk by a ratings agency.
The S&P move is also Petrobras' second downgrade to junk this year after Moody's Investors Service stripped the company in February.
Many foreign pension funds and other large investors are required to unload bonds once two separate agencies rate them as speculative grade. That could lead to a plunge in the price of existing Petrobras debt and limit the pool of buyers for new offerings.
The second source said that a revision of the plan's premises and spending will be needed.
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With PBR's equity price also collapsing...
We leave it to one of Reuters' sources to conclude: "These are times that will try our hearts."