Petrobras Launches Sale of Bonds to Raise $11 Billion

SAO PAULO - Brazilian state-run energy giant Petroleo Brasileiro SA on Monday began its enormous 2013 financing campaign with one of the largest bond issues this year.

Petrobras, as the company is better known, on Monday launched the sale of $11 billion in bonds through six separate sets of bonds, with maturities of between three and 30 years, according to term sheets provided by fund managers.

There was sufficient demand for Petrobras' investment-grade bonds for the firm to have raised up to $40 billion, according to a person with knowledge of the transaction. The total size could still increase, as the company has an option to offer up to 5% more to Asian investors later in the day.

Investors had been preparing for the sale, as Petrobras has stated it aims to borrow about $20 billion this year and a similar amount next year to fund its ambitious $237 billion multi-year investment plan. The company is leading Brazilian efforts to develop huge offshore oil fields known as the pre-salt reserves.

"We reduced our Petrobras exposure significantly earlier this year in expectation of this issue," said Joon Hyuk Heo, head of global fixed income at Mirae Asset Global Investors, with more than $2 billion in emerging-market assets.

Prices on Petrobras' existing bonds have traded around 110 cents to the dollar in recent months from its 2012 high of 115 cents to the dollar--according to MarketAxess BondTicker data--on concerns about fresh supply and the level of government intervention in the company.

Mr. Joon said recent valuation on Petrobras' debt makes the deal attractive, but the longer-term outlook for commodities and Brazilian companies is less of a draw. Mr. Joon said Petrobras had an advantage in issuing floating rate notes, as they were rare and would drive up demand. He planned to buy the five-year tranche of the deal.

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Viewpoint: Good reasons for sticking with corporate bonds

The record low yields seen on corporate bonds still have the scope to go lower. However caution is required in this kind of environment and that careful credit selection, diversification and sound liquidity management is needed.

These concerns are valid, but the recent hysteria around corporate bonds, and in particular market liquidity, is exaggerated in my opinion. I believe that a conservatively run corporate bond portfolio with prudent liquidity management and access to good credit research offers the best risk-return mix for investors. I also think that corporate bonds continue to play a valuable role within most well-diversified portfolios.

Of course, you may think that as manager of one of the largest funds in the Corporate Bond sector, I have a vested interest in taking this stance. I would disagree, however. The position I am in ensures that I constantly think about these issues and the best methods to tackle the current challenging environment.

Yields on investment-grade bonds are at record lows. I think investors are right to question how low they can go, regardless of the robust corporate fundamentals that support credit.

My view is that they can go quite a bit lower because the environment of "financial repression" we are in today is likely to continue for some time. That is because central bankers and politicians remain welded to austerity and ultra loose monetary policy. It's understandable - they are eager to improve fiscal balances and avoid prolonged economic contraction. It is likely that this will extend the low-growth, low-inflation and low-interest-rate environment we see today with significant tail risks attached.

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