Petrobras Bond Default Odds Increase; Aurelius Ups Pressure

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The Petrobras bribery and corruption scandal is starting to have serious ramifications on the firm’s financial situation. According to Katia Porzecanski and Paula Sambo of Bloomberg News, Aurelius Capital Management LP’s bid to declare Petroleo Brasileiro in default on certain bonds has led the cost to protect against a Petrobras non-payment to soar to the highest level since the aftermath of the financial crisis.

Aurelius claims Petrobras violated bond contracts

New York-based hedge fund Aurelius claimed in a letter obtained by Bloomberg News last week that Petrobras had violated bond contracts by failing to report third-quarter results on time. According to Aurelius, Petrobras had until December 29 to announce 3Q earnings according to the contracts on some of its $53.6 billion of bonds.

“Holders of the bonds should immediately take the prudent precaution of giving formal notice,” Aurelius claimed  in the letter. “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’s assurances as a certainty.”

“They only have a window to make this happen and they may get other investors to join them,” Jorge Piedrahita, CEO of Torino Capital LLC, noted in an e-mail exchange with Bloomberg. “Institutional long-only investors just want this to be over and keep receiving their coupons.”

Petrobras delaying results to assess impact of bribery investigation

Of note, Petrobras has already delayed reporting its financial results twice so it can better assess the impact of a federal investigation into bribes the firm allegedly received from several major construction companies. Aurelius, a well-known legal vulture hedge fund, has fought countries such as Argentina and companies such as General Motors in U.S. courts, is trying to encourage holders of at least 25% of a series of Petrobras notes, the threshold needed for the default notice to be valid, to file for default.

Petrobras first delayed its earnings in December as board members argued about the size of writedowns related to the corruption scandal, according to an anonymous company source said on December 12th. The firm noted then that creditors had waived the reporting requirements until the end of January.

Aurelius’s letter noted that that the waiver only applied to one of Petrobras’s credit facilities, and that at least $4.1 billion of Petrobras debt was technically in default.

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