Petrobras: A Hundred Years of Vicissitude

Petrobras plans to sell 100-year bonds. Investors may want to look at the recent performance of a similar issue from Mexico.

By Richard Barley

Updated June 1, 2015 12:43 p.m. ET

How long is a century? That may depend on who it is issuing a 100-year bond.

Brazilian state-run oil company Petrobras PBR 5.97 % , mired in a corruption scandal, filed plans Monday to issue century bonds denominated in U.S. dollars. Aside from Petrobras’s and Brazil’s own woes, buyers will have to weigh the risk inherent in such long-dated bonds. Mexico helpfully provides an example of how quickly the view of such debts’ value can change.

That country issued a 100-year euro-denominated bond in early April, just before global bonds threw a tantrum. That was initially snapped up due to the global hunt for yield caused by ultraloose monetary policy. The fact investors had such a hankering for it, even though the bond only had a 4% coupon, shows just how thirsty for yield markets really are.

The catch is that long-dated debt can be very sensitive to moves in interest rates. Bond math alone means the shine can quickly come off such issues.

Petrobras, besides its legal travails, is subject to the vagaries of the oil price, fluctuations in the reais, and Brazilian politics. The company has been at pains to say it isn’t considering a dilutive sale of new shares to shore up its highly stretched balance sheet. It may see issuing very long-dated debt as a way to square that circle.

Given such issues, though, Petrobras will have to offer investors higher returns than Mexico. Initial talk puts the yield at around 8.85%. Even then, buyers may find a century is a very, very long time, indeed.

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