Petrobras Unit Debt Proves Too Cheap to Resist: Argentina Credit

Petrobras Argentina SA (PESA)’s dollar bonds, beaten up on concern the government would block debt payments, now look irresistible trading at the biggest discount to its Brazilian parent since June.

Yields on the bonds due 2017, after surging 27 basis points last week, or 0.27 percentage point, have dropped 26 basis points this week, part of a rebound in Argentine assets sparked by growing confidence that President Cristina Fernandez de Kirchner won’t force issuers to repay overseas debt in pesos. The rally has narrowed the yield gap with similar-maturity debt from Rio de Janeiro-based Petroleo Brasileiro SA (PETR4) to 146 basis points from 165 basis points last week, when Fernandez refused Chaco province’s request for the dollars it needed to pay local debt.

Petrobras Argentina’s borrowing costs are falling faster than the average for Argentine companies as the oil producer’s debt is backed by its Brazilian parent, giving investors more confidence the notes will be repaid, according to Capital Markets Argentina. Average yields on international government bonds have dropped seven basis points this week to 10.56 percent, JPMorgan Chase & Co. data show.

Petrobras Argentina’s bonds are “guaranteed by Petrobras Brazil and it’s been punished, so that has created an opportunity,” Noelia Lucini, a portfolio manager at Capital Markets, said in a telephone interview from Buenos Aires. “The news in the last two weeks aroused uncertainty.”

Brazil Guarantee

A press official at Buenos Aires-based Petrobras Argentina who asked not to be identified in accordance with company policy declined to comment on the bonds.

Bonds of Brazil’s state-controlled oil company, known as Petrobras, are rated A3 by Moody’s, three steps above investment grade and the same rating as the 2017 bonds issued by its Argentine unit.

The $300 million of notes due in 2017 are supported by a purchase agreement provided by Petrobras, which requires the parent company to pay bondholders in case of a default and “is designed to function in a manner similar to a guarantee,” according to the bonds’ prospectus.

The backing should keep the borrowing costs of Petrobras Argentina, the nation’s fourth-largest oil producer, low, with yields of about 50 basis points more than those of the parent company on average, according to Jim Harper, director of corporate research at BCP Securities LLC.

Currency Restrictions

Moody’s lowered Petrobras Argentina’s outlook to negative on Sept. 28 after doing the same for the Argentine government, citing Fernandez’s “haphazard policies.” A month earlier, the company’s rating had been cut to B1, reflecting the risk of further government intervention in the oil industry following the expropriation of oil-producer YPF SA (YPFD) in April.

Since her re-election a year ago, Fernandez banned dollar purchases for savings, real estate and the repayment of debt issued under local law by provinces and companies in a bid to slow capital flight and preserve foreign reserves.

Argentine corporate debt lost 1.04 percent last week, the biggest weekly loss since June 29, according to JPMorgan’s CEMBI index. The selloff also spread to local and international law government bonds.

An investment surge into emerging-market notes in September on the back of stimulus measures by policy makers in the U.S., Europe and Japan means that some bondholders are less likely to understand the terms of their debt contracts, according to Jack Deino, a portfolio manager at Invesco Inc.

Money managers increased their investments in emerging- market bonds by $1.9 billion in September to $6.5 billion, according to research company EPFR Global.

‘Bite You’

“Half the guys that are buying these deals are not even reading the indentures or the covenants or the prospectuses or anything,” Deino said at Fitch Ratings’ Fifth Annual Emerging Markets Conference in New York on Oct. 16. “That can come back to bite you.”

In addition to Chaco’s $26.7 million of bonds due in 2015 and 2023, other securities subject to the measures include $96.7 million of Tucuman province bonds due in 2015 and 2020 and $41.4 million of debt sold by the province of Formosa due in 2022, according to Buenos Aires-based research company Economia & Regiones SA.

Chaco, a soy bean-producing region in the north of Argentina, will swap its dollar-denominated debt for peso bonds, Governor Jorge Capitanich said in an Oct. 17 interview on CN23 while recommending that other provinces follow his lead.

Provinces Cut

Moody’s lowered the credit ratings for Chaco, Formosa and eight other provinces and municipalities on Oct. 17, citing difficulties in obtaining foreign currency. The ratings company cut the foreign-currency credit ratings to Caa1, seven steps below investment grade, for the provinces of Buenos Aires, Cordoba and Mendoza, as well as the city of Buenos Aires.

Argentina made a $200 million debt payment Oct. 17 on domestic law bonds due 2017, Fernandez said that day. The Argentine government and issuers that sold bonds under international law can still get dollars to repay creditors, according to the central bank.

With the lowest yields among 34 Argentine corporate bonds tracked by Bloomberg, Petrobras Argentina’s bonds aren’t paying investors enough to offset the risk associated with investing in Argentina, according to Mario Rappoport, a managing director at Gleacher & Co.

Lowest Yields

“In Argentina, you have headline risk and you have it constantly,” Rappoport said in a telephone interview from New York. “I understand it’s Petrobras, fully owned, but at this spread, it doesn’t make that much sense to take the risk.”

The gap over Petrobras’s bonds due in 2018 soared to 636 basis points in April, when Fernandez seized a controlling stake in YPF from Madrid-based Repsol SA. (REP) That’s a signal that investors should demand an interest rate of at least 225 basis points more than that of the parent company before buying Petrobras Argentina’s bonds, Rappoport said.

The extra yield investors demand to hold Argentine government dollar bonds instead of U.S. Treasuries rose six basis points, or 0.06 percentage point, to 851 basis points at 12:36 p.m. in Buenos Aires, according to JPMorgan’s EMBI Global index.

The cost of protecting Argentine debt against non-payment for five years with credit-default swaps rose eight basis points to 979 basis points, data compiled by Bloomberg show. The swaps pay the buyer face value in exchange for the underlying securities or cash if a government or company fails to comply with debt agreements.

Weaker Peso

Warrants tied to Argentina’s economic growth rose 0.01 cent to 12.64 cents. The peso weakened 0.1 percent to 4.7369 per dollar.

Investors who own Petrobras’s securities should consider switching into Petrobras Argentina’s bonds, according to BCP’s Harper. The Argentine unit’s notes are as safe as those of the parent and offer a higher yield, according to BCP’s Harper.

“You’ve got to emphasize this is Petrobras risk,” he said by telephone from Greenwich, Connecticut. “It’s not Argentina risk. To the extent that that spread has widened, it’s even more compelling to swap from one into the other.”

To contact the reporters on this story: Katia Porzecanski in New York at kporzecansk1@bloomberg.net; Drew Benson in New York at abenson9@bloomberg.net

To contact the editors responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net; Michael Tsang at mtsang1@bloomberg.net

Peru's net international reserves amounted to US$ 57.14 billion at June, 2012

Peru's net international reserves (NIRs) at June 26 amounted to US$ 57.14 billion, the Central Reserve Bank (BCR) of Peru said Friday.

This level of reserves is US$ 257 million higher than the one recorded at the end of May 2012.

The increase registered in NIRs so far this month is mainly explained by banks’ increased deposits (US$ 162 million), as well as by higher investment yield (US$ 122 million).

This was partially offset by lower public sector deposits (US$ 33 million).

The foreign exchange position of the BCR at June 26 was US$ 40.66 billion, which is US$ 129 million higher than the one recorded at the close of May 2012.

Peru Keeps 4.25% Rate As Greece, Protests Threaten Growth

Peru’s central bank

Peru’s central bank kept borrowing costs unchanged for a 13th month as Europe’s financial crisis and protests against mining companies threaten to derail a rebound in investment.

The seven-member board, led by bank President Julio Velarde, maintained the overnight rate at 4.25 percent, matching the forecasts of all 18 economists surveyed by Bloomberg.

“Uncertainty has increased again in the international financial markets and as a result a decline in international commodity prices is being observed,” policy makers said in a statement posted on the central bank’s website.

Growth of South America’s sixth-largest economy accelerated in the first quarter for the first time since 2010 as investor confidence fueled a rebound in construction. Though rising demand may fuel inflation that’s been above target for 11 months, policy makers are more concerned about the effects of a global slowdown, said Siobhan Morden, head of Latin American fixed income strategy at Jefferies & Co Inc.

“Domestic demand is very strong but external risks have clearly worsened,” Morden said in telephone interview from New York. “They won’t hike rates not knowing the outcome of Europe. Central banks are typically conservative and don’t want to flip flop in terms of their policy management.”

‘Great Uncertainty’

The price of copper, Peru’s top export, has dropped 19 percent in the last year as Europe’s recession damps growth in China, the biggest consumer of industrial metals, and amid concern the U.S. recovery is faltering.

Peru’s exports fell 12 percent in April from a year earlier to $3 billion, a one-year low, on declines in copper, zinc and fishmeal prices, the Trade Ministry said June 5.

“There’s great uncertainty about what will happen to external demand and how it will hit economic activity,” Velarde said May 29. “We’re probably less optimistic than we would have been six weeks ago” about growth exceeding the central bank’s 5.7 percent forecast for this year, he said.

Increased social unrest has also clouded the outlook for the $176 billion economy, he said.

The government declared a state of emergency last week in the southern Andean province of Espinar after at least two people died in protests against an Xstrata Plc (XTA) copper mine that community leaders say is polluting water supply. Local residents are also demanding a bigger share of profits.

Infrastructure Spending

Newmont Mining Corp.’s (NEM) $4.8 billion Minas Conga gold project was suspended in November after street protests against what would be Peru’s biggest-ever investment. The protesters resumed demonstrations on May 31.

About $50 billion of mining investment is on stand-by because of the unrest, Finance Minister Miguel Castilla told state television June 4. The industry accounts for about 20 percent of fiscal revenue and 60 percent of exports. The investments are needed to fuel 6 percent growth this year and halt a decline in the country’s mining production, he said.

Gross domestic product rose 6 percent in first three months of this year as private investment climbed at the fastest pace in three quarters and the government stepped up infrastructure spending.

Government tax revenue rose an annual 8.9 percent last month, the most since February, while demand for consumer goods fueled a 9.4 percent increase in imports, the tax and customs duty collection agency said June 4.

The central bank raised reserve requirements for the first time in a year on May 1, citing concern foreign inflows risk fueling demand for dollar-denominated loans and stirring inflation pressures.

Easing Commodities

Annual growth in bank lending slowed to 16 percent in April from 18 percent in March as demand for dollar loans eased, the central bank said last week.

Consumer prices rose 0.04 percent in May, the slowest pace in four months, after food and fuel costs fell. Prices rose 4.1 percent from a year earlier. The central bank targets annual inflation of 1 percent to 3 percent.

Easing oil and grain prices will allow inflation to converge to the target next year, said Felipe Hernandez, an economist at RBS Securities Inc. in Stamford, Connecticut.

“Peru may want to hike once or twice more just to bring neutral rates to a slightly higher level” should external risks subside, Morden said. “If there were an extreme shock from Europe, there would be case for easing instead of hiking.”

To contact the reporter on this story: John Quigley in Lima at jquigley8@bloomberg.net.

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.

BBVA Studies Sale Of Its Pensions Operations In Latin America

BBVA HQ MADRID

 Banco Bilbao Vizcaya Argentaria SA (BBVA) is considering selling all or part of its pensions units in Chile, Colombia, Peru and Mexico as Spanish banks step up sales of assets in Latin America.

BBVA is planning the sale because there isn’t a big enough overlap between its pensions unit and its consumer-banking operations in those countries, Spain’s second-biggest lender said in a filing to regulators today. Any sale probably won’t happen this year, the Bilbao-based company said.

Banco Santander SA (SAN), Spain’s biggest lender, has also been selling assets in Latin America as it prepares an offering of shares in its Mexican bank later this year. It follows the sale of its lender in Colombia and insurance businesses and stakes in its Brazilian and Chilean units.

Spanish banks are under pressure to raise capital as the government makes them recognize more losses on real estate piled up on balance sheets during the country’s real estate boom.

“BBVA maintains its strategic commitment for the Latin American market and shall continue to invest in the region,” the bank said in the statement.

BBVA’s Latin American pensions business that may be sold has assets under management of 55 billion euros ($69 billion) and posted 183 million euros of profit in 2011.

ING Groep NV last July announced the sale of most of its Latin American insurance operations to Colombia’s Grupo de Inversiones Suramericana for about 2.7 billion euros in a transaction that valued the business at about 16 times earnings. Applying the same multiple to a possible BBVA sale would value the units at about 3 billion euros.

To contact the reporter on this story: Charles Penty in Madrid at cpenty@bloomberg.net; Esteban Duarte at eduarterubia@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net