In a recent transaction, Moody's Investors Service assigned a Baa1 rating to Petrobras International Finance Co.'s $450 million notes, instigating controversy over a rating that some market sources feel is slightly inflated.

Brazil-based Petrobras is the country's largest company, with revenues reaching $27 billion and totaling nearly $39 billion in assets. As a result, many sources say the state-controlled entity is linked too closely to the government to be rated so much higher than Brazil's B1 sovereign foreign currency rating from Moody's.

Other market sources seem more puzzled by the fact that Moody's can provide such a high rating with a B1 rating on the company's long-term foreign currency debt and a Baa1 rating for the company's local currency rating. Sources say the B1 rating is basically the government's rating.

Many sources say there is more risk involved with this transaction because there is no securitization taking place. "They are saying we'll issue a bond and we'll pay it,'" one market observer said. "There's nothing behind the structuring to make it better than the Petrobras risk."

In the transaction, an offshore subsidiary of Petrobras will issue notes, and if the subsidiary does not pay the shareholders, Petrobras, through a Standby Purchase Agreement, has agreed to purchase the noteholders' rights to collect payments made to them from the subsidiary. Additionally, the transaction features a political risk insurance policy from Steadfast Insurance Co., a subsidiary of Zurich American Insurance Co.

Regardless of the political risk insurance, some market participants argued that the deal should have been rated closer to the sovereign rating, "If the sovereign is having problems, they are going to try to accumulate their resources, or consolidate their resources," the market source said. "One of [Brazil's] greatest resources or assets, is Petrobras. So to the extent that [the government] needs cash to keep on surviving, they're going to go wherever they can to get that cash. The point is, they are going to start interfering in Petrobras, they'll start using Petrobras resources for other things."

The source commented that it is not uncommon for such an occurrence, as it has happened in Venezuela. "You shouldn't be able to distance yourself too far from that government rating," the source said.

Moody's, however, argues that there is enough of a distinction between Petrobras and the government. According to a special comment report from April 2001, Moody's said the probability of government interference with the oil-company's ability to pay on current debt obligations is low. Furthermore, in August 2000, there was a $4.0 billion global equity offering, which reduced the government's voting control over the corporation from 85% to 56%. Brazil has also become less dependent upon oil revenues as the economy has improved.

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