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Bond holders pushing for a Petrobras default

Petrobras may incure a default on its 53.6 billion outstanding debt if it does not report on third-quarter earnings results by the end of February.  Aurelius Capital Management, a New York based hedge fund, expects “Petrobras to be shut out of the international capital markets” if it does not report on 3Q earnings.  The delay in reporting comes as Petrobras is dealing with a probe into allegations of corruption within the company., December 30, 2014

Petrobras HQAurelius Capital Management LP asked creditors of state-controlled oil producer Petroleo Brasileiro SA (PETR4) to tell the company its failure to report earnings violated bond terms, an infraction that would constitute a default if it isn’t resolved within 60 days.

Under rules governing $53.6 billion of outstanding debt, Brazil ‘s state-controlled oil producer had until today to report third-quarter results, New York-based hedge fund Aurelius said in the letter obtained by Bloomberg News . Declaring a credit event would give Petrobras, which hasn’t released the data as it assesses the impact of a probe into alleged corruption at the company, about two months to report earnings before falling into technical default.

“Holders of the bonds should immediately take the prudent precaution of giving formal notice,” Aurelius said in its letter. “If Petrobras still has not released its Q3 financials by early March, the underlying causes of the delay may be considerably worse than is understood today. Regardless, we would expect Petrobras to be shut out of the international capital markets until its financial reporting is normalized.”

Petrobras has twice delayed reporting its third-quarter results as prosecutors accuse at least 30 people of corruption and money laundering tied to construction contracts, $22 billion of which emanated from the oil producer.

Creditors were asked to disclose their holdings to Aurelius before hiring legal counsel. For the notice of default to be valid, it must be sent by holders of at least 25 percent of each series of notes or the trustee, according to the letter and bond documents. Once the grace period ends, the same threshold is required for bondholders to demand immediate repayment in a maneuver called acceleration.

Default Swaps

The move may be a first step toward triggering a payout on Petrobras’s credit default swaps. The net notional outstanding amount of the company’s bond derivatives was $4.1 billion as of Dec. 19, data compiled by Depository Trust & Clearing Corporation show.

Five-year CDS contracts were little changed today at 3.68 percentage points, according to data compiled by Bloomberg. Benchmark Petrobras bonds due in 2024 rose 0.18 cent to 96.12 cents on the dollar.

The occurrence of a credit-default event — which includes acceleration — its date and the date on which the derivatives are triggered would be determined by theInternational Swaps and Derivatives Association ‘s committee should holders of the contracts ask for a ruling.

Writedown Size

Brian Schaffer, a spokesman for Aurelius at the public-relations firm Prosek Partners in New York , confirmed the authenticity of the letter and declined further comment. Petrobras didn’t comment when contacted by e-mail and telephone.

Petrobras delayed its third-quarter earnings report this month as board members differ on the size of writedowns stemming from graft-related costs, a person who asked not to be identified because the information isn’t public said Dec. 12.

The oil company said in a statement that day that creditors waived the reporting requirements until the end of January. Aurelius’s letter said that waiver only applied to one of its credit facilities.

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