- Despite today’s low-interest-rate environment, the bond market still provides occasional opportunities.
- Petrobras has a new six-part bond offering with yields up to 7.25%.
- I think the 10-year notes are the most attractive part of the offering.
In today's low-interest-rate environment, one of the ways to find value in the bond market is to purchase corporate and municipal bonds when spreads have widened. Even when market-wide spreads are at levels many would find unattractive (as is the case today), there are often company-specific opportunities worth exploring.
For investors who don't regularly keep up with breaking news in the bond market, you may be interested to learn about a brand new offering from Petrobras Global Finance (NYSE:PBR). The six-part offering which is "unconditionally guaranteed by" the parent company Petrobras, includes senior unsecured debt with expected ratings of Baa1/BBB and yields up to 7.25%.
Here is a breakdown of the $8.5 billion offering:
· $1.4 billion of March 17, 2017 maturing senior unsecured floating-rate notes, CUSIP 71647NAJ8, with a coupon rate of three-month U.S. dollar LIBOR plus 2.36%. The settlement date is March 17, 2014. Interest is paid quarterly, beginning June 17, 2014.
· $500 million of March 17, 2020 maturing senior unsecured floating-rate notes, CUSIP 71647NAL3, with a coupon rate of three-month U.S. dollar LIBOR plus 2.88%. The settlement date is March 17, 2014. Interest is paid quarterly, beginning June 17, 2014.
· $1.6 billion of March 17, 2017 maturing senior unsecured notes, CUSIP 71647NAG4, with a coupon of 3.25%. The settlement date is March 17, 2014. Interest is paid semiannually, beginning September 17, 2014.
· $1.5 billion of March 17, 2020 maturing senior unsecured notes, CUSIP 71647NAH2, with a coupon of 4.875%. The settlement date is March 17, 2014. Interest is paid semiannually, beginning September 17, 2014.
· $2.5 billion of March 17, 2024 maturing senior unsecured notes, CUSIP 71647NAM1, with a coupon of 6.25%. The settlement date is March 17, 2014. Interest is paid semiannually, beginning September 17, 2014.
· $1.0 billion of March 17, 2044 maturing senior unsecured notes, CUSIP 71647NAK5, with a coupon of 7.25%. The settlement date is March 17, 2014. Interest is paid semiannually, beginning September 17, 2014.
This six-part bond offering is so new that the final prospectus supplement has yet to be filed. But you can peruse the preliminary prospectus supplement here. Additionally, it is worth noting that the fixed-rate notes have make-whole calls, and all six series of notes have a conditional call for tax reasons.
When companies attempt to price large bond offerings, such as the $8.5 billion of bonds Petrobras just priced, it is not unusual for investors to demand higher yields in order to soak up the additional supply. As long as you like the credit risk associated with the company, a large bond offering often represents an opportunity to capture higher yields (wider spreads to Treasuries) than you otherwise would.
In this case, investors willing to take on a bit more risk in their individual bond portfolios should consider the brand new Petrobras bonds. Specifically, I think the 10-year notes are the most attractive part of the offering. While you can capture an extra percentage point of yield by going with the longest-dated notes, it also requires potentially holding the bonds an extra 20 years. Investors with shorter-term time frames should also be content with the fixed-rate yield of 3.25% on the three-year notes.
As part of your due diligence, the following brief overview of Petrobras may be useful (Source - petrobras.com.br):
In U.S. dollar terms, Petrobras had $11.094 billion of net income in 2013, a 0.54% increase from 2012. Furthermore, Petrobras exceeded its $1.7 billion target for cost reductions, finishing 2013 at $2.8 billion in savings. Additionally, asset sales contributed $3.8 billion to cash flow in 2013, bringing the total to $10 billion in asset sales since its divestment program known as PRODESIN was established in 2012. Other financials worth sharing can be found below (Source - Page 4 of Petrobras' 4Q13 Financial Report USD):
Finally, I'd like to remind readers that Treasury bills, notes, and bonds do not by themselves represent the entire bond market. Even though benchmark Treasury yields are historically low, investors with an appetite for risk can find yields elsewhere, without having to allocate 100% of their portfolios to stocks.
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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am long Petrobras bonds, although not the ones mentioned in this article.