Fitch: Petrobras' 3Q Statement Exacerbates Uncertainties
30 January 2015 - 5:08AM
Business Wire
Petroleo Brasileiro S.A.'s (Petrobras [BBB/ Stable])
third-quarter financial statement release without assets write-offs
prevented the oil company from violating some debt covenants. The
decision to delay recording an impairment does not have an
immediate credit impact according to Fitch Ratings, although it
does prolong the uncertainty surrounding the company's ability to
make the necessary adjustments to comply with covenants that
require it to report audited year-end financials within 120 days of
the period's end, plus a 60-day grace period. The decision to delay
also highlights the difficulties of estimating the magnitude of the
corruption overpayments and fair value of fixed assets.
The potential magnitude of assets write downs as a result of the
scandal could be significant but will not impact the company's cash
or cash flow generation. Dividend payment policy could change once
the asset write down takes place but will not provide a meaningful
reduction in cash outflows as the bulk of the company's negative
free cash flow generation results from its large capex plans.
Initial estimates reveal a net overpayment of approximately BRL61
billion, or approximately 10% of Petrobras' fixed assets, yet this
amount includes both the overpayments related to the corruption
scandal as well as other impaired asset charges possibly due to
cost overruns associated with inefficiencies of the projects.
Although Fitch expected Petrobras to release its third-quarter
results with the impairments, the agency still believes the company
would take the necessary steps to comply with its covenant
requirements, namely the requirement to release year-end audited
financial statements. The corruption scandal surrounding Petrobras'
contracting practices holds the potential to negatively affect its
credit quality and ratings to the extent that it effects the
company's operations and liquidity or should it receive monetary
penalties associated with the scandal.
The corruption scandal may affect the company's operations to
the extent it affects delivery of production units or the
availability of key equipment, namely offshore drilling rigs. The
latter risk has been heightened by the company's decision to ban
all business groups associated with the scandal from contracting
and participating in bids, given that this affects most offshore
drilling rig contractors. The company's operations will suffer
under a prolonged ban that makes it difficult for Petrobras to
procure key equipment for its operations.
Significant uncertainty surrounds potential monetary penalties
the company could incur as a result of the scandal, namely as a
result of a class action lawsuit against the company initiated by
U.S. equity investors. Nevertheless, Petrobras' ability to
withstand significant monetary penalties is limited, given the
company's weakening capital structure.
For more on this topic please see our report titled, "What
Investors Want to Know: Petrobras; Scandal Could Affect Credit
Quality," which is available on our website
www.fitchratings.com
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch
Wire credit market commentary page. The original article, which may
include hyperlinks to companies and current ratings, can be
accessed at www.fitchratings.com. All opinions expressed are those
of Fitch Ratings.
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Fitch RatingsLucas AristizabalSenior DirectorCorporatesFitch
Ratings+1 312-368-326070 West Madison StreetChicago,
IllinoisorMauro StorinoSenior DirectorCorporates+55 21 4503-2625Rio
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