Mar 2, 2016 12:30 PM ET

Archived: Moody’s downgrades Petrobras and Petrobras Argentina’s ratings

iCrowdNewswire - Mar 2, 2016

Moody’s downgrades Petrobras and Petrobras Argentina’s ratings

Global Credit Research – 24 Feb 2016


New York, February 24, 2016 — Moody’s Investors Service, (“Moody’s”) downgraded all ratings for Petroleo Brasileiro S.A. – PETROBRAS (“Petrobras”)’s and ratings based on Petrobras’ guarantee, including the company’s senior unsecured debt and Corporate Family Rating to B3 from Ba3. The company’s baseline credit assessment (BCA) was lowered to caa2 from b3. At the same time, Moody’s downgraded Petrobras Argentina S.A. (“PESA”)’s ratings, including its senior unsecured medium term note program and Corporate Family Rating to B3 from B2, in line with the senior unsecured rating of Petrobras.

The outlook for Petrobras and PESA’s ratings is negative.

This rating action for Petrobras concludes the review for downgrade initiated on December 9, 2015, which followed an action placing Brazil’s government bond rating under review. Today’s action follows Moody’s downgrade of Brazil’s government bond rating to Ba2 from Baa3.

The rating action on PESA concludes the review for downgrade initiated on January 21, 2016, which was prompted by Moody’s revised expectations for weaker oil prices over the next several years.


..Issuer: Petroleo Brasileiro S.A. – PETROBRAS

…. Corporate Family Rating, Downgraded to B3 from Ba3

….Senior Unsecured Shelf, Downgraded to (P)B3 from (P)Ba3

….Senior Secured Shelf, Downgraded to (P)B3 from (P)Ba3

….Preferred Shelf, Downgraded to (P)Caa3 from (P)B3

….Subordinate Shelf, Downgraded to (P)Caa1 from (P)B1

Outlook Actions:

..Issuer: Petroleo Brasileiro S.A. – PETROBRAS

….Outlook, Changed To Negative From Rating Under Review


..Issuer: Petrobras Argentina S.A.

…. Corporate Family Rating, Downgraded to B3 from B2

….Senior Secured Medium-Term Note Program, Downgraded to (P)B2 from (P)B1

….Senior Unsecured Medium-Term Note Program, Downgraded to (P)B3 from (P)B2

Outlook Actions:

..Issuer: Petrobras Argentina S.A.

….Outlook, Changed To Negative From Rating Under Review


..Issuer: Petrobras Global Finance B.V.

….Backed Senior Unsecured Regular Bond/Debenture, Downgraded to B3 from Ba3

Outlook Actions:

..Issuer: Petrobras Global Finance B.V.

….Outlook, Changed To Negative From Rating Under Review

..Issuer: Petrobras International Finance Company

….Backed Senior Secured Shelf, Downgraded to (P)B2 from (P)Ba2

….Backed Senior Unsecured Shelf, Downgraded to (P)B3 from (P)Ba3

….Backed Subordinate Shelf, Downgraded to (P)Caa1 from (P)B1

….Backed Senior Unsecured Regular Bond/Debenture, Downgraded to B3 from Ba3

Outlook Actions:

..Issuer: Petrobras International Finance Company

….Outlook, Changed To Negative From Rating Under Review


Petrobras’ caa2 baseline credit assessment (BCA) indicates Moody’s view of its standalone credit strength, and considers the company’s steadily eroding liquidity, negative free cash flow, high financial leverage, local currency devaluation risk, and operating challenges in a difficult industry and economic environment. Consolidated free cash flow will remain negative in the foreseeable future as its upstream business suffers from extremely weak oil prices and downstream operations are being hurt by lower demand, high competition and local currency volatility. The company also faces significant risks related to corruption investigations and class action securities litigation.

Petrobras’ B3 ratings also consider Moody’s joint-default analysis for the company as a government-related issuer. Petrobras’ rating downgrade to B3 reflects Moody’s current assumption for a moderate likelihood of timely extraordinary support from the government of Brazil. Previously Moody’s had assumed a high likelihood of such support. Despite its stated willingness to stand behind Petrobras, Moody’s believes that the government’s current fiscal situation could prevent it from supporting Petrobras sufficiently to avoid a default. Petrobras’ rating now incorporates two notches of uplift between Petrobras’ BCA and its senior unsecured rating, down from three notches previously. Moody’s continues to assume moderate default dependence between Petrobras and the government.

Refinancing risk is an increasing concern. Petrobras has about USD 12 billion in debt maturing in 2016 and about USD 11 billion maturing in 2017. As of September 2015, the company had roughly USD 25 billion in cash holdings, of which we believe USD 8-10 billion is needed for day-to-day operations. Nearly half of maturing debt in this period is owed to bondholders, with the balance being financial institutions and other creditors. The company has not accessed public markets in recent months. Close to 100% of the company’s assets are unencumbered so Petrobras may be able to offer security if this facilitates needed financing.

Given its large debt maturities and negative free cash flow, Moody’s believes that Petrobras will need substantial asset sales proceeds by 2017 to meet its cash needs in the absence of new financing. Petrobras announced plans to sell USD 14.4 billion in assets in 2016. Although Moody’s recognizes that the company’s has attractive valuable assets, execution of the sale program as planned may be difficult under current global industry conditions and Brazil’s economic and political situation.

Petrobras’ caa2 BCA and B3 rating are supported by the company’s large-scale reserve base and dominance in the Brazilian oil industry, and its importance to the Brazilian economy. Furthermore, the ratings reflect the company’s sizeable pre-salt reserves, its technological offshore expertise and potential for continued growth in production over the long-term.

PESA’s rating downgrade to B3 reflects Moody’s view that the company is not insulated from the credit condition of Petrobras, its main shareholder. Despite PESA’s strong credit metrics for its rating category and the still relatively favorable conditions for the energy industry in Argentina, the equalization of the ratings considers that Petrobras could negatively affect PESA’s credit quality, including by removing cash through dividends.

Moody’s assumes that the Argentine government has incentives to maintain prices at a level that makes it economically attractive for oil companies to invest to increase production and reduce the country´s dependence on imports of oil and gas. In addition, oil royalties support various provinces and their labor force, which are dependent on the oil and gas industry. The recent 11% oil price reduction to 67 dpb in Argentina was more than offset by a 50% local currency devaluation, which should improve PESA’s cash flow in 2016.

PESA’s B3 ratings also consider the company’s position as a relatively small diversified energy company. Its operations and capital risk are concentrated in oil and gas production, with a record of poor upstream capital efficiency, characterized by low levels of investment and reserve replacement and rising costs, caused in the past by Argentina’s regulatory and price controls. In recent years, the company has reduced debt and strengthened its liquidity position. With declining reserves and a relatively short reserve life, PESA’s primary operational challenge will be to extend a largely mature asset base and show rising production and reserve growth over the next few years.

Petrobras’ ratings have a negative outlook, reflecting Moody’s expectation that, in the next 12 to 18 months, the company’s liquidity and financial ratios may deteriorate further as a consequence of delays in asset sales and weak cash flow generation, driven by persistent low oil prices, reduced demand for oil products in Brazil, increasing competition from imports of oil products and local currency devaluation risk.

PESA’s negative outlook is aligned with Petrobras’s rating outlook but assumes that Argentina’s new government will be supportive of crude and oil products production.

As indicated by the negative outlook, positive rating actions for Petrobras are unlikely over the near term. However, positive action could be considered if the company raises sufficient sums through asset sales or new debt arrangements to refinance its upcoming debt maturities and significantly strengthen its liquidity profile. While asset sales would reduce future revenues and cash flow, actions that strengthen the company’s liquidity are currently likely to have a greater credit impact than the related longer term reduction in production and revenues.

Negative actions on Petrobras’ ratings could result from further deterioration in its liquidity or financial profile. Downgrades could also be prompted if negative developments from the corruption investigations or litigation against the company appears to have the potential to significantly worsen the company’s liquidity or financial profile.

Petrobras’ ratings could also be affected by changes in the government of Brazil’s rating or Moody’s view of the likelihood of extraordinary support from the government.

Although unlikely at this point, a positive rating action for PESA would be merited if Moody’s perceives stronger credit insulation from its parent company. However, any upgrade of PESA’s ratings would also depend on Moody’s view that the company will be able to sustain its currently solid financial ratios and liquidity position.

Negative actions on PESA’s ratings could result from further downgrade of Petrobras’ ratings. A downgrade of the Argentine government that may reflect increasing political and regulatory risk, or a governmental initiative on setting reference prices that puts pressure on PESA’s cash flows, debt service capabilities or liquidity, could also put negative pressure on PESA’s ratings.

The principal methodology used in Petroleo Brasileiro S.A. – PETROBRAS, Petrobras Global Finance B.V. and Petrobras International Finance Company ratings was Global Integrated Oil & Gas Industry published in April 2014. Other methodologies used include the Government-Related Issuers methodology published in October 2014. Please see the Ratings Methodologies page on for a copy of these methodologies.

The principal methodology used in rating Petrobras Argentina S.A. was Global Independent Exploration and Production Industry published in December 2011. Please see the Ratings Methodologies page on for a copy of this methodology.

Petrobras, based in Rio de Janeiro, is an integrated energy company, with total assets of USD 234 billion as of September 30, 2015. Petrobras dominates Brazil’s oil and natural gas production, as well as downstream refining and marketing. The company also holds a significant stake in petrochemicals and a position in sugar-based ethanol production and distribution. The Brazilian government directly and indirectly owns about 46% of Petrobras’ outstanding capital stock and 60.5% of its voting shares.

PESA is an integrated energy company with operations including petroleum exploration and production, refining and product distribution, and petrochemicals. It also has interests in electric generation, and in gas pipelines and NGLs production through Transportadora de Gas del Sur (TGS, Caa1 positive). For the last twelve months ended September 30, 2015, the company generated revenues of USD 2.4 billion and had total assets of USD 2.8 billion. Petrobras holds a controlling 67.2% interest in PESA with the remainder held by public float. PESA has business mainly in Argentina but also in Bolivia, Ecuador and Venezuela.


For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on for additional regulatory disclosures for each credit rating.


Contact Information:

Nymia C. Almeida
VP - Senior Credit Officer
Corporate Finance Group
Moody's de Mexico S.A. de C.V
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
JOURNALISTS: 001-888-779-5833

Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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