Petrobras to raise up to US$ 2.3 Billion in IPO of it’s distribution subsidiary

BR Distribuidora, distribution arm of Petrobras (PBR), started yesterday the process that should be the largest IPO since 2013 in Brazil. With the sale of a maximum of 33.75% of its stake in BR, the parent company Petrobras may raise up to R$ 7.5 billion (US$ 2.3 Bi), an important figure for its divestment plan. This estimate takes into account the placement of all lots for sale and the ceiling of the indicative range of price per share, which ranges from R$ 15 to R$ 19, according to the prospectus released yesterday. In the pessimistic scenario, Petrobras would raise R$ 4.4 billion by selling 25% of the shares.

Considering the stock price range disclosed, BR should arrive on the stock exchange on December 15th , with a market cap between R$ 17.5 billion and R$ 22.1 billion (US$ 5.4 bi and 6.7 bi). Despite the expressive absolute valuation, it has a discount ranging from 26% to 40% against the trading multiples of one of its main competitors, Ultrapar, owner of the Ipiranga distribution network.

According to market sources, what explains the discount is the fact that, despite the governance safeguards included in its statute – such as the requirement that half of the directors be independent – the company will remain a state-owned company and, therefore, subject to political interference.

The perception in the market is that BR’s offer will not have demand issues. The question will be the price, to be officially set on December 13. While local managers will bargain discount, but should stay out, foreign investors have already given signs of interest. Because of the discount size offered relative to its peers, BR expects to attract enough demand to close the price between the middle and the ceiling of the range.

Adding the expected market cap range to the net debt of R$ 3.86 billion in September, BR should have company valuation between R$ 21.3 billion and R$ 26 billion. This concept of company valuation assumes that the company’s future cash flow will be shared between its shareholders and creditors.

When dividing this amount by BR’s adjusted profit before interest, taxes, depreciation and amortization (Ebitda) in the last 12 months, which was R$ 3 billion, one arrives in multiples of 7.1 times in the floor of the prices per share, 7.9 times at the midpoint and 8.7 times at the peak.

On yesterday’s trading session, Ultrapar’s shares traded at a multiple of 11.8 times its Ebitda in the last 12 months, hence the discount. Ipiranga represents 75% of the consolidated Ebitda of Ultrapar, which is a holding company.

Fitch keeps the Brazilian credit rating at BB, with negative outlook

Fitch Ratings reinforced Brazil’s credit rating on ‘BB’, with a negative outlook. That is, with the possibility of the classification being revised downwards in the future.According to the agency, the country’s ratings is limited by the structural weaknesses in public finances and high government debt, weak growth prospects and weaker governance indicators than the country’s peers, in addition to the recent history of political instability.

These weaknesses, Fitch added, are offset by the economic diversity of Brazil and consolidated civil institutions.

The negative outlook reflects the continuity of uncertainties related to the sustainability and strength of the Brazilian economic recovery, the prospects for medium-term debt stabilization and the progress of the legislative agenda, especially the pension reform.

Fitch expects a modest cyclical recovery in Brazil, with growth accelerating from 0.6% in 2017 to an average of 2.6% during 2018 and 2019. Consumption began to recover, sustained by lower inflation, which drives wage gains, stabilization of the unemployment rate and a recovery of consumer credit. A recovery in investment is also expected in the coming years.

According to the agency, the risks that can cause the government not to reach its fiscal goals in the short term include a weaker economic recovery and the difficulty in cutting public spending, especially in the election year. The implementation of the pension Reform and other adjustments will be necessary to ensure that expenditures meet the target in the medium term.

Fitch projects that Brazilian public debt will continue to grow during the forecasted period, even taking into account the impact of the National Treasury’s loan payments anticipated by the National Development Bank (BNDES) between 2017 and 2018. The agency projects that debt will reach 76% of GDP in 2017 (above the median of the “BB” countries, 45%) and advance to 80% in 2018.

Brazil’s current account deficit is expected to fall below 1% in 2017, according to Fitch projections, and should remain below 2% in the period projected by the agency. The deficit fell 80% during the first nine months of 2017, compared to last year, with the growth of the trade surplus.

Funding of Brazilian companies with debt and equity jumps to R$ 192 billion (US$ 60 bi)

The wind begins to shift to the capital market in the wake of falling interest rates to near historic lows and the contraction of bank credit after two years of deep recession. Since last year, the favorable environment has opened space and consolidates a trend of strong growth for corporate debt issues, along with capital openings and subsequent stock offers, which increasingly assume a major role as a source of financing for large companies .
Between January and September, data from the Brazilian Association of Financial and Capital Market Entities (Anbima) shows that the issuance of fixed income securities in Brazil and abroad by companies plus funding through variable income in the country reached R$ 176.3 billion, or three and a half times the volume of R$ 49.9 billion granted by BNDES in the same period, according to figures from the state bank itself.

For Sergio Goldstein, chairman of Anbima’s corporate finance committee, the expansion is expected to continue in 2018: “the economy probably accelerates next year and thus there’s no way the capital market does not come along.”

A singularly favorable situation fuels this movement of greater participation of the capital market as a source of funds: falling interest rates and prospects that it will remain close to historical lows for a prolonged period, low inflation, growth, albeit gradual, and a change in the policy of subsidized rates by the BNDES.