Brazil’s state-run oil company Petrobras could be declared in technical default on some of its foreign debt as early as Tuesday if bondholders adhere to a campaign to force it to speed up its assessment of losses in a giant corruption scandal.
The campaign, which is being led by New York-based Aurelius Capital, applies only to the $54 billion of Petrobras bonds governed by U.S. law in New York state. Aurelius, a “distressed debt” or “vulture” fund, is asking investors to put the company into default as “a precautionary step,” according to a Dec. 29 letter from the firm reviewed by Reuters.
Under the terms of those bonds, Petrobras is required to provide third-quarter financial statements within 90 days of the end of a quarter, in this case by Monday, Dec. 29. Petrobras has not published those accounts because allegations of contract-fixing and bribery at the company have raised doubts about the true value of its assets.
For the default declaration to take effect on any of the more than 20 U.S. law bonds outstanding, investors holding at least 25 percent of each series must request the action, Aurelius said in the letter to fellow bondholders.
Aurelius was a leading member of a group of investors that refused to accept a debt restructuring with Argentina, taking the country to court.
Petrobras, which first planned to release results in early November, has extended the deadline to Jan. 31 as new corruption allegations came to light, saying it had a waver from investors but not giving any details.
Petrobras did immediately respond to a request for comment.
“We believe bondholders should immediately take the prudent precaution of giving formal notice of default,” Aurelius managing director Eleanor Chan wrote. “While mere notice of default should not itself cause a crisis, bondholders cannot avoid a crisis merely by sticking their heads in the sand and accepting Petrobras’ assurances as a certainty.”
Few have suggested Petrobras will be unable to pay its debts in the short or medium term. It has huge oil resources and the backing of the Brazilian government, whose officials have said they will backstop the company.
Petrobras, though, is already frozen out of capital markets because of the scandal and is in danger of losing its investment-grade debt rating, a situation that would reduce the pool of potential investors and raise its borrowing costs.
A notice of default will require Petrobras to provide financial statements by early March or face calls for early repayment of debt.
Even if matters do not reach that stage, the declaration will increase pressure on Petrobras executives to negotiate with bondholders and come to a credible accounting of the costs of the corruption scandal, a reckoning that Petrobras’ own CEO said could take months.
“If Petrobras releases its third quarter financial statements by the beginning of March, the default will be cured,” Aurelius said. “If Petrobras still has not released its third quarter financials by early March, the underlying causes of the delay may be considerably worse than is understood today.”