Petrobras Debt Moves Deeper Into Junk Territory

To say that Petroleo Brasileiro S.A. (NYSE: PBR), better known as Petrobras, has had a tough year may be the understatement of the year. Oil prices have plummeted, the company is embroiled in a corruption scandal and Brazil’s economy is in a shambles. Now rubbing a little more salt in the wounds is Moody’s Investor Services.

Moody’s on Wednesday downgraded all of Petrobras’s ratings by one notch, from Ba2 to Ba3. At the same time the ratings agency put all the ratings on review for another possible downgrade. Here’s what Moody’s had to say:

These rating actions reflect Petrobras’ elevated refinancing risks in the face of deteriorating industry conditions that make it more difficult to raise cash through asset sales; tighter financing conditions for companies in Brazil and in the oil industry, coupled with the magnitude of eventual needs to finance debt maturities; as well as the company’s negative free cash flow. The rating actions also considered Moody’s December 9th, 2015 decision to place Brazil’s government Baa3 bond rating under review for possible downgrade.

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In its press release related to the possible downgrade of Brazilian government bonds, Moody’s said:

The review for downgrade is driven by i) rapidly and materially deteriorating macroeconomic and fiscal trends and diminished likelihood of trend reversal in the next 2-3 years; and ii) worsening governability conditions and increased risk of policy paralysis. During the review, Moody’s will assess the likelihood of further deterioration in the government’s fiscal position against the agency’s baseline assumptions supporting the current Baa3 rating, and the prospect of a faster and more significant rise in the government’s debt trajectory, in the context of heightened political uncertainty, declining investor confidence and deeper than expected recession.

Brazil’s current government debt rating is the last notch above junk.
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