Petróleo Brasileiro S.A. (NYSE: PBR), or Petrobras in street terms, is far from your typical global oil giant. The company is effectively owned by the state and by employees, is mandated on pricing by the Brazilian government and has shareholders as far down the capital structure line as they can possibly be. Despite all the corruption down in Brazil that Petrobras has spent time in the barrel about, the investing public just loaned Petrobras’ global finance unit some $2.5 billion in a whopping 100-year bond offering.

Not many companies and countries get to issue 100-year bonds. It also was reported this week that demand was strong for the issue as well. What is amazing to 24/7 Wall St. is that, despite the yield, investors seem to be treating these as having implied guarantees or strong support by the Brazilian government (see Fitch and Moody’s notes below) rather than just being guaranteed by Petrobras itself.

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Another boost has come from the firm Tudor Pickering, which has said that Petrobras shares could rise to as high as $15.00 ahead. The report seems overly optimistic and treats Petrobras like it is a real company rather than a public government societal slush fund. Still, some of the view is based on multiyear views out to 2020 rather than the operations today. Tudor Pickering even derived a sum of the parts analysis of $24, noting an expected 15% discount to peers.

These are referred to as notes rather than bonds in the filing, but 100 years is far longer than the 10-year limit to be called a note. In the oil sector, aren’t the green and renewable folks hoping that the oil industry will be out of business in 100 years?

Petrobras’ SEC filing shows that the 100-year bonds were issued by Petrobras Global Finance B.V. (PGF), and they were unconditionally guaranteed by Petróleo Brasileiro. The filing also showed that the $2.5 billion in global notes also came with a 6.85% coupon, but the initial pricing to the public of 81.07% of face value per note actually raised $2.0267 billion.

Amazingly, this large debt offering required only two book-runners: Deutsche Bank Securities and J.P. Morgan. The filing showed that PGF intends to use the net proceeds from the sale of the notes for general corporate purposes.

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The filing said:

The 6.850% Global Notes due 2115 are general, unsecured, unsubordinated obligations of Petrobras Global Finance B.V., a wholly-owned subsidiary of Petróleo Brasileiro S.A. The Notes will be unconditionally and irrevocably guaranteed by Petrobras. The Notes will mature on June 5, 2115 and will bear interest at the rate of 6.850% per annum. Interest on the Notes is payable on June 5 and December 5 of each year, commencing on December 5, 2015.

Another issue is that PGF may redeem, in whole or in part, these notes at any time by paying the greater of the principal amount of the notes and the “make-whole” amount, plus accrued interest. The notes will also be redeemable without premium prior to maturity at PGF’s option solely on the imposition of certain withholding taxes.

PGF intends to apply to have these notes approved for listing on the New York Stock Exchange.

The common American depositary shares (ADSs) of Petrobras rose from $8.37 on Monday to $8.92 on Tuesday. They were up another 2.2% at $9.12 Wednesday morning. Petrobras remains a troubled entity, and it is perhaps the most complex and risky of the global oil giants that trade in the United States. Still, think about this: if there is strong demand for a 100-year bond offering with such callable and takeaway clauses for a company that is as anti-investor as Petrobras, how on earth could you not expect the stock to rise on the news?

What is equally amazing here is that this week’s ratings agency news gave favorable ratings from what has been seen so far. Fitch Ratings assigned a BBB- rating, which is investment grade. Standard & Poor’s also went with a BBB- rating. Fitch said (emphasis added):

Petrobras’ ratings continue to reflect its close linkage with the sovereign rating of Brazil due to the government’s control of the company and its strategic importance to Brazil as its near monopoly supplier of liquid fuels. Absent implicit and explicit government support and its defacto monopoly position, Petrobras’ credit quality is not commensurate with an investment grade rating. Government support is evidenced by the recent lending commitments offered by stated-owned Banco do Brasil and Caixa Economica Federal as well as the decision to maintain gasoline and diesel prices at the pump significantly above international levels in order to bolster Petrobras’ cash flow generation. By law, the federal government must hold at least a majority of Petrobras’ voting stock. The government currently owns 60.5% of Petrobras’ voting rights, directly and indirectly, and has an overall economic stake in the company of 48.9%. Petrobras’ cash position is sufficient to meet its short-term funding needs.

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Moody’s gave a junk-bond rating of Ba2. Its rating hinted at government support, and that said (emphasis added):

Near term financial performance will worsen before it could start gradually improving in the next couple of years, as oil prices start a solid upward trend. Petrobras’ high financial debt, which reached close to USD125 billion (as reported) in March 2015, compares to the company’s expectation of generating USD25 billion in operating cash and spending USD29 billion in capex in 2015. Petrobras plans to borrow USD13 billion during 2015, to end the year with USD20 billion in cash… Our assumptions are of high support from the government of Brazil (Baa2 negative) and moderate dependence between Petrobras and the government. The government support provides three notches of uplift to Petrobras’ BCA. 

Let’s assume for a second that Brazil really does have an implied guarantee here. Over and over, despite great opportunity and despite many great expansionary periods, Brazil just often lands in situations where it consistently falls short of its potential. The nation is also currently under a socialist-leaning regime rather than one that is bent on creating economic growth. That may also change multiple times over the next 100 years.

Whether or not these bonds come with an implied guarantee, collecting the money through time may be harder than some investors think.

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