Brazilian corporate bonds were on a tear Thursday morning after oil company Petrobras avoided a covenant breach with the release of its long-awaited audited results for 2014.
By satisfying covenant deadlines for reporting financials, Petrobras has avoided a debt acceleration that may have resulted in government intervention - a move that in itself could have impacted Brazil's credit standing.
"The avoidance of a technical default is seen as positive in itself as that has avoided stress for the sovereign," said an investor involved with the credit.
Petrobras's curve tightened by up to 50bp this morning with the 2024s being quoted at 410bp, according to a New York based trader.
The company reported non-cash impairment cost of R$44.3bn plus an additional R$6.19bn in corruption related losses, not to mention a jump in net leverage to 4.77x.
However, unlike equity investors who sent the company's stock some 2.4% lower Thursday, the credit markets cheered, with analysts expecting more spread tightening on the horizon.
"The fact that they reported the audited results is more important than the numbers themselves," said Klaus Spielkamp, head of fixed-income sales at Bulltick in Miami.
Barclays analysts see the potential for another 125bp spread tightening at the front end of the company's curve as it moves forward with its divestment plans and the new management releases a new business plan over the next month.
The UK bank also expects Moody's to upgrade Petrobras by one notch to Ba1, leading to a re-entry into several high-grade indices. The company is rated BBB- by both S&P and Fitch.
Others are less sanguine. "I think this is more an opportunity to sell more than buy," said a trader. "Yes they have released their numbers on time, but leverage is high and they still need to come to market."
Still, the news had investors pushing prices on both Brazilian sovereign and corporate debt higher, with the country's 2025s hitting 101.75 offer before falling back to 100.75-101.15. Other Brazil corporate bonds also rallied in sympathy, including Braskem Gerdau and Odebrecht.
(Reporting By Paul Kilby; editing by Shankar Ramakrishnan)
