Shares of Petrobras (NYSE:PBR) fell 10% during Monday's session (December 2, 2013) on the Bovespa, Brazil's stock exchange. The news that the government decided against increasing prices for Petrobras' products drove the dramatic sell off. For days Petrobras insiders have been leaking stories to the press that reinforced the oil giant's proposal to increase its prices for gasoline and other petroleum-based fuel sold in Brazil. Given that the Brazilian government is the majority stakeholder in the firm, the Dilma/Mantega machine needed to sign off on the proposal in order for the company to proceed. Today the government announced a non-decision decision regarding the price increases that no one really understands and the market punished Petrobras severely. We look at recent payment problems in ABS that collateralized by Petrobras receivables to try to get a handle on just how bad the situation is for this behemoth.
Many Sources Discuss the Negative Outlook for Petrobras
One would have thought that the government had received the market's message; they have been telegraphed in non-ambiguous terms. On October 13th, 2013, Moody's reduced Petrobras' global foreign currency debt ratings to Baa1 from A3. Moody's stated that "the downgrade reflects Petrobras's high financial leverage and the expectation that the company will continue to have large negative cash flow over the next few years as it pursues its aggressive capital spending program." "Successful execution on its ambitious capital program and delivery on aggressive production targets will be the key to reducing leverage in the next few years and to stabilizing the rating outlook," said Thomas Coleman, Senior Vice President in the press release.
Then came the stinging article last week by Cláudia Schüffner and Fernando Torre in Brazil's main business publication, Valor Econômico. The article (in Portuguese), published on November 26th and titled "Petrobras has the Worst Situation of the Decade," pointed out that the drop in oil production from 2.0 million barrels/day in 2011 to 1.9 million barrels/day in September 2013 had forced Petrobras to import oil to meet domestic demand.
Since Petrobras subsidizes prices at artificially low levels in Brazil to help the government meet its economic goals, the oil producer and refiner has been paying more for the oil than it receives from sales in Brazil's local markets. This cash outflow due to politically driven pricing policies weighs on the company's balance sheet and strains the already tight cash flow problems due the previously mentioned ambitious investment program.
Insights from Asset-backed Securities Collateralized by Petrobras Receivables
While the current events paint a dark picture for Petrobras, our analysis of asset-backed securities (ABS) in Brazil reveals an even darker scenario. First, let us explain the securities in question. From about 2009 to 2010 onward, Petrobras encouraged financial structuring entities to construct a type of Brazilian ABS called a Fundo de Investimento em Direitos Creditórios (FIDC) specifically designed to finance its suppliers. This particular FIDC worked in the following manner, a supplier to Petrobras signs a contract to supply the oil giant with services and the contract has an amount in Brazilian Reals for completing the service based on performance on given dates. The supplier can then sell the collection rights to a FIDC and receive an upfront lump sum payment for the contract for a discounted price. Petrobras then pays the FIDC full face that will yield X% based on the discounted price and the prompt payment of contract. Seems like a no lose situation, right?
The problem is that all the four FIDCs that we found with Petrobras Fornecedore (Petrobras Supplier) in the name are suffering from late payments. In Exhibit 1 we show the ageing schedule for delinquent payments in the FIDC BI Invest Fornecedor Petrobras. It shows that obligations Due and Not Paid for 121 to 150 days and for 151 to 180 days have been climbing over the last year. Note: This data comes from the Monthly Report Comissão de Valores Mobiliários (NYSEMKT:CVM) - equivalent of the Securities and Exchange Commission in the United States.
Source: CVM Monthly Report
Exhibit 2 shows the levels of assets in the BI Invest portfolio in relation to its own provisions for bad debt. The provisions for bad debt in October of this year are five times (5X) higher than they were in December 2012.
Source: CVM Monthly Report
While all FIDCs are experiencing increases in delinquent loans, the Petrobras Fornecedore FIDCs are seeing above average increases in delinquencies as a percent of the credit portfolio. Based on an unweighted average, delinquencies as a percent of credit increased on average 200% in 2013 (starting with January 2013 to October 2013, Source: Uqbar - Orbis System). Petrobras, one of the few Brazilian companies to have a global investment grade rating, is more delinquent in its FIDCs than the average Brazilian company that probably could not even get a local rating above B or BB.
The numbers seem strange because of some unique attributes of the Brazilian ABS market and because of lack of transparency. For instance, FIDC AGN Suppliers to Petrobras began 2013 with R$28.3 million in assets, R$18.6 million in receivables, and $4.9 million in delinquent receivables (more than one day delinquent). The bulk of the delinquencies, R$3 million, were in the 91 to 121 day bucket.
As of October 2013, the FIDC had R$19.3 million in assets, but only R$939,361 in current receivables (it appears that the bulk of the receivables have been written off or shoved into the R$16 million in committed operations - a questionable classification), and R$17.4 million in delinquent receivables. Of the $17.4 million, 87% were more than 121 days past due. (The 1852% of receivables is a measurement from Uqbar and roughly equal R$17.4 million / R$930 thousand - we did not adjust this to keep it consistent with the other FIDCs)
In addition, the R$400 million FIDC Trendbank Multisetorial, which has been closed by the manager due to the high level of delinquencies, also had exposure to Petrobras. We are still trying to verify information regarding two of Petrobras' major suppliers that have petitioned Brazilian bankruptcy courts for protection from creditors due to late payments from Petrobras.
In conclusion, Petrobras' recent credit history as revealed by these asset-backed securities is very troubling. First, it adds color to the text of Moody's recent downgrade: the negative cash flow is probably much more negative than we thought. Next, Petrobras is known for delaying payments to small companies when things get bad, but the fact that Petrobras would hold up payments to investors shows an arrogance that is typical of this Brazilian government. Finally, given the size of Petrobras and its role in the Brazilian economy, the knock-on effect of its troubles will definitely spread throughout the economy and affect all of Brazil. Investors in Petrobras and funds with heavy exposure, such as EWZ might want to evaluate their outlook. Finally, investors in companies that have supply contracts with Petrobras should check the most recent financials of those suppliers to look for any related and deteriorating trends.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.