Petrobras long-term debt rating cut by Moody's on cash flow woes

Reuters

RIO DE JANEIRO, Oct 3 (Reuters) - Moody's Investors Servicedowngraded the debt of Brazil's state-run oil company, PetroleoBrasileiro SA, on Thursday on concern that fuelsubsidies and huge investment commitments will cause its debt togrow until at least 2015.

Moody's cut the rating on the long-term, foreign currencydebt of Petrobras, as the oil company is known, to "Baa1" fromA3. Debt in Moody's Baa range "is subject to medium credit risk"and "may posses certain speculative characteristics." Whilestill "investment grade," Baa1 is the highest rated debt withspeculative aspects, according to Moody's.

The downgrade comes as a rebuke to Chief Executive OfficerMaria das Graças Foster, who has made controlling costs one ofthe main goals of her nearly two years at the Rio deJaneiro-based company.

While the new rating is three notches away fromnon-investment grade, a level that would require many pensionfunds and major investors to sell its debt, the outlook for thecompany is negative, Moody's said.

In late 2012, Petrobras debt exceeded its own internal limitof 2.5 times earnings before interest, taxes, depreciation andamortization (EBITDA). Debt soared as domestic fuel subsidies,declining output and a $237 billion expansion plan, the world'slargest corporate spending program, crimped revenue, even ascosts soared. Significantly increased production is stillseveral years away.

"We see Petrobras' leverage to be at nearly peak levels in2013 and 2014, significantly higher than those of its industrypeers and only likely to decline in 2015 and beyond," ThomasColeman, a Moody's senior vice president, said in a statement.

"Successful execution on its ambitious capital program anddelivery on aggressive production targets will be key toreducing leverage in the next few years and to stabilizing therating outlook."

Petrobras had $112.4 billion of debt as of June 30, 17percent more than a year earlier. Net debt, or debt minus cashand marketable securities, was $79.6 billion.

The company's spending is likely to be almost double its owncash generation from operations, and debt rose by $16.8 billionin the first half of 2013, Moody's said.

Petrobras did not immediately have a comment on thedowngrade.

The company now has $11.25 of debt for every barrel ofproved reserves and it has $64,000 of debt for each barrel ofdaily output, the highest level of similar integrated oilcompanies such as Exxon Mobile Corp and Royal DutchShell Plc, or state oil companies such as Colombia'sEcopetrol SA and Mexico's Pemex.

Moody's on Wednesday lowered its outlook on Brazil'ssovereign debt rating to "stable" from "positive," as thecountry's economy struggles with the impact of three years oflow growth, flagging investment and swelling debt.

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