When the world’s most indebted company postpones an earnings release due to a widening corruption scandal, a wobble in the markets is to be expected. Such was the case on Friday for the Brazilian oil giant Petrobras, which saw its stock fall 8 percent (before recovering slightly) and the yields on its bonds spike sharply upward on the news that company executives in Brazil had been arrested as part of a broad corruption investigation. President Dilma Rousseff, who was the head of the Petrobras board before she became president in 2010, is not the only person, however, who will be feeling the pain of the company’s mounting troubles. Few emerging market companies are as widely held by equity and bond investors as Petrobras, long seen as a benchmark play for investors looking for exposure to fast-growing developing markets. From Oppenheimer’s $42 billion emerging market fund — where it is the fourth largest holding — to the fund giant Pimco, Petrobras is a central emerging market investment. According to Bloomberg data, Pimco is the largest holder of the company’s debt — holding 4.3 percent, with Fidelity the second largest holder at 2.5 percent. In fact, more than just about any other emerging market company, Petrobras has taken advantage of the trend in which asset management companies — mostly based in the United States — have replaced banks as the main source of debt financing. Economists estimate that foreign bondholders have financed close to half of the the company’s huge investment program. And as the company has said that it expects to invest over $200 billion in the years ahead to explore new oil sites, investors at Pimco, BlackRock and Fidelity will be asked to step up their lending if the company is to meet its goals. Attracted by robust yields in a low interest rate environment, the money to date has been rolling in. Petrobras, in the last five years, has sold $51 billion in bonds to yield-starved global investors, nearly a quarter of all corporate bonds emanating from Brazil and the most of any emerging-market company, according to data compiled by Thomson Reuters.But economists like Hyun Song Shin at the Bank for International Settlements, a research shop for global central banks, have been warning for some time now of the risks involved in having emerging market corporates so dependent on fickle retail investors in the United States. And from a financial stability perspective, regulators at the New York Federal Reserve have cautioned against large asset management companies having outsize positions in high-risk emerging market debt. The fear is that panic selling in one company or country could spread quickly — since these countries and companies are so widely held — leading to a wider investment contagion. For now, that does not seem to be the case, with the Brazilian stock exchange losing just 1 percent on Friday. But with investors broadly uneasy about emerging markets, given the prospect of higher interest rates in the United States and weaker local currencies against a strong dollar, the prospect that Petrobras may be kindling for a larger conflagration in Brazil cannot be totally discounted. “This definitely raises larger issues,” said Gary N. Kleiman, an emerging-market investment consultant. “Many investors will be forced to sell and this could lead broader sell-off in Brazil and Latin America.”
Posted on: Tue, 18 Nov 2014 21:35:06 +0000
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