By Karin Strohecker and Simon Jessop
LONDON () – Brazil’s shake-up of state-owned oil company Petrobras has caused shockwaves at home, but may also cause some bond investors to reconsider their $ 1 trillion plus exposure to other state-controlled companies across new markets.
From China’s Exim Bank to Mexican oil giant Pemex or South African utility Eskom, wholly or partly state – owned companies make up half of the $ 2.4 trillion market in corporate debt in new markets.
Such state-owned enterprises (SOEs) are generally in high demand from investors, first as their bonds have an interest premium over government debt and secondly due to the perception of government backing.
But Brazilian President Jair Bolsonaro’s sudden firing of Petroleo Brasileiro SA’s CEO last Friday in favor of an army general “reminds investors of the risks involved in investing in state-owned enterprises or quasi-sovereigns,” Eric Ollom said. head of EM corporate debt strategy in Citi. .
Petrobras shares plunged to wipe out a $ 100 billion reais ($ 18 billion) in market value in two days, and its bonds fell after Bolsonaro announced the CEO change in a social media post following a spit over fuel pricing policy.
Emerging SOE debt – concentrated in finance, commodities and energy – accounts for about one-fifth of EMBI’s new debt benchmark prepared by JPMorgan. Management, as in Petrobras, is just one of the concerns.
IMF’s Top Non-Financial SOEs https://fingfx.thomson.com/gfx/mkt/gjnpwzrryvw/IMF%20top%20non-financial%20SOEs.PNG
Utilities and electricity companies may be subject to politically motivated pricing directives, while financial information and productivity may delay the private sector.
Profitability can take the back seat with political priorities such as creating employment or winning elections.
“First and foremost, investors need to find out and understand where this SOE fits into the agenda of the country’s political and socio-economic economy … its social significance as an employer or as a contributor to the budget,” Sergey Dergachev, a fund manager at Union Investment , said.
He still likes Petrobras, but is waiting and sees attitude for now for a company that regularly catches the spotlight. In 2018, the government stepped in to lower fuel prices in response to a crippling nationwide truck driver strike, while last week’s dismissal of CEO came after right-wing populist Bolsonaro said recent increases in fuel prices hurt the Brazilian people.
Other investors like Citi’s Ollom are more skeptical, noting that Petrobras bond spreads relative to the sovereign erupted to several-month highs of nearly 100 bps, from 30 bps. The move also affected Brazil’s currency and its government bonds.
“If we keep getting bad news, maybe we can get a more permanent pricing,” Ollom said.
Investors are not yet in a hurry to sell out of SOEs in the new market more widely.
And close government ties can be a blessing.
Mexico just expanded a $ 3.5 billion lifeline to state-owned oil company Pemex to bolster the economy and crude production. The government’s support allows Pemex to run a net debt bar of 8.5 times – far above many other oil companies.
Debt repairs are rare in SOEs, though Chinese bond markets have recently been intimidated by a wave of SOE defaults, and Argentina’s YPF this year was forced to revise its debt.
“The” backing “of governments behind debt obligations could represent possible” coupon buffers “and a signal of stability,” said Guillaume Mascotto, head of ESG and investment manager at American Century Investments.
Nevertheless, the risk of government interference poses a dilemma for investors, especially for asset managers who focus on the environmental, social and governmental (ESG) impact of their investments, Mascotto said.
Corruption is another headache. State-owned companies in nations with “high levels of perceived corruption” are a third as productive as their peers in the private sector, according to a recent report by the International Monetary Fund.
Assets in new markets were affected by the fallout from the pandemic last year, triggering billions of dollars in outflows. Bonds from wholly state-owned companies moved largely in lockdown with government debt.
About 90% of state-owned companies have credit ratings on par with their sovereign. Most deviations, where SOE is classified under the sovereign, are investment-quality companies, where standard probability differences are insignificant, calculates asset manager GMO.
However, the Petrobras shock can test the close link.
If investors begin to question the ability and / or willingness of the sole shareholder – government – to support a company, interest rate spreads between the sovereign and the SOE can decouple.
“Increased leverage on government balances may reinforce this development,” said Thede Ruest, Nordea’s portfolio manager.
The feedback loop can work both ways. Morgan Stanley on Monday knocked Brazil’s government bonds off its ‘similar’ list, citing fiscal concerns and potential spills following Bolsonaro’s push.
Investors’ growing ESG focus is another source of pressure, said Ruest, who avoids quasi-sovereignty.
“Higher financing costs as well as a global push to redirect capital towards business models that support the UN’s Sustainable Development Goals (SDGs) may make refinancing more difficult for many of these issuers,” he said.
($ 1 = 5.5308 reais)