A few weeks ago, Apple completed a massive $17 billion, six-part bond offering. Although not as large as Apple’s record-breaking corporate bond deal, Petrobras, the Brazilian energy giant, just completed quite the massive bond offering of its own. Its six-part, $11 billion offering, was issued by the subsidiary Petrobras Global Finance B.V. and includes both fixed-rate and floating-rate notes. The offering was broken down as follows:
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All of the notes pay interest in U.S. dollars and are rated A3/BBB by Moody’s and S&P respectively. The four fixed-rate issues have make whole calls at 25 basis points (2016 notes), 35 basis points (2019 notes), and 40 basis points (2023 and 2043 notes) over the applicable Treasury rate. Moreover, each of the fixed-rate and floating-rate notes have a conditional call at par due to certain tax reasons.
As would be expected, the prospectus supplement filed by Petrobras is full of more information than can be discussed in this article. But there are a couple of things in particular I would like to mention. In the section called, “Description of the Notes,” there is a general description of the terms of each of the issues. Included in each of the six descriptions was the following paragraph (the name of the notes, i.e. “2016 Notes,” however, changes accordingly):
“In the case of amounts not paid by PGF under the indenture and the 2016 Notes (or Petrobras under the guaranty for the 2016 Notes), interest will continue to accrue on such amounts at a default rate equal to 0.5% in excess of the interest rate on the 2016 Notes, from and including the date when such amounts were due and owing and through and excluding the date of payment of such amounts by PGF or Petrobras.”
The fact that Petrobras Global Finance (PGF) is required to pay a higher interest rate in the event of a delay of an interest payment is something I found to be a positive for the investor. Also, within that paragraph, you might have noticed the fact that Petrobras, in addition to PGF, was mentioned as a possible payer of interest. Why is that?
According to the aforementioned prospectus supplement, the PGF notes outlined above are all unconditionally and irrevocably guaranteed by Petróleo Brasileiro S.A., also known as Petrobras. More specifically, the prospectus supplement says the following, among other things, regarding the guarantee:
“The obligation of Petrobras to pay amounts in respect of the guaranteed obligations will be absolute and unconditional upon failure of PGF to make, at the maturity date of the 2016 Notes, the 2019 Notes, the 2023 Notes, the 2043 Notes, the 2016 Floating Rate Notes or the 2019 Floating Rate Notes, as applicable, or earlier upon any acceleration of the applicable notes in accordance with the terms of the indenture, any payment in respect of principal, interest or other amounts due under the indenture and the applicable series of the notes on the date any such payment is due.”
In a nutshell, if PGF fails to fulfill its obligations on the notes, Petrobras will step in and make the payments. While this is a good thing for investors, there is something of which to be aware regarding withholding taxes. PGF is domiciled in the Netherlands. Therefore, the Brazilian government does not withhold any taxes from payments made to holders of PGF’s notes. If Petrobras, however, is required to make a payment as guarantor, the Brazilian government would withhold funds from the payments. The withholding tax for interest payments is generally 15% or 25% depending on whether the holder of the notes is a resident of a low or zero tax jurisdiction.
With that said, under the terms of the prospectus, if tax is withheld from any payments made by Petrobras, the company would be required to indemnify non-Brazilian-resident notes holders in an amount equal to the amount that such non-Brazilian-resident holders would have received if no such taxes were imposed. But as you might expect, there are exceptions to this. The exceptions can be found in two places, and I suggest taking a look at them prior to purchasing any of the PGF notes. First, in the Indenture dated August 29, 2012, the exceptions can be found in “Article Ten – Covenants,” “Section 10.04 – Additional Amounts.” The other place the exceptions can be found is in the “Payment of Additional Amounts” section on page 17 of the prospectus dated August 29, 2012.
Before purchasing any of the notes mentioned in this article, please remember to do your own due diligence on the financial profile of the issuer and guarantor. Only you can determine if taking the counterparty risk of buying individual bonds is right for you. Finally, please review the prospectus, prospectus supplement, and Indenture, as there may be additional details important to you that were not mentioned in this article.
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