By Luciana Magalhaes And Paul Kiernan
SÃO PAULO--A corruption investigation involving Brazilian
state-controlled energy firm Petroleo Brasileiro SA is now being
viewed as a liability to investors, who just a few months ago
snapped up some of the company's shares in the wake of the
scandal.
Petrobras confirmed this week it is being investigated by the
U.S. Securities and Exchange Commission in relation to Brazilian
prosecutors' allegations that it was at the heart of a vast
money-laundering and kickback scheme. The share price has dropped
more than 40% since hitting an 18-month high in early September,
and the company delayed its third-quarter earnings report because
of auditors' doubts.
"No one knows how big the hole is (in the company's numbers),"
said Carlos Gribel, head of fixed income at Andbank Brokerage in
Miami. "A lot of people think that worse things could start to come
out."
According to prosecutors and suspects arrested in the case, a
group of major construction firms in Brazil colluded to overcharge
Petrobras for tendered contracts, allegedly paying bribes to local
politicians and Petrobras executives along the way.
The case has dominated news reports in Brazil for months, but it
wasn't always seen as a clear negative for Petrobras. After Federal
Police announced the arrest of a former Petrobras executive on
March 20, the firm's preferred shares shot up 24% over the next two
weeks on hopes that a corruption scandal at the state-owned company
would hurt left-leaning President Dilma Rousseff's re-election
chances.
"There is a good amount of concern from clients," said Alejo
Czerwonko, an emerging markets economist at UBS Wealth Management,
which oversees $1 trillion in assets. "Growth has been
disappointing for an economy of the importance of Brazil and the
corruption allegations don't help," said Mr. Czerwonko, who
declined to comment specifically about Petrobras, but said clients
have been calling with questions about what is going on in
Brazil.
With political uncertainty subsiding, investors are now trying
to understand what the investigation means for the company. Ms.
Rousseff won the election last month, while another major source of
doubt will likely be resolved this week with the expected
nomination to head the Finance Ministry.
Petrobras' shares reached 24.56 reais in early September, when
opinion polls were showing Ms. Rousseff behind in the presidential
race. But the price has plunged since then as Ms. Rousseff regained
the lead in polls as more details of the alleged corruption
emerged. Petrobras' shares closed at 14.10 reais on Wednesday.
The company has said it is the victim of the alleged corruption
scheme. But Petrobras could still face costs that go beyond the
millions of dollars in legal fees that the company has already
started paying.
Morgan Stanley analyst Bruno Montanari said in a report last
week that the most immediate outcome of the probe is likely to be a
"sizable asset write-off and lower dividends for voting shares."
The amount of the write-down will likely range from 5 billion
Brazilian reais ($2 billion) in a best-case scenario to 21 billion
in the worst case.
Earlier this month, the company delayed the release of its
third-quarter earnings because auditors were uncomfortable signing
off on the numbers until the extent of the alleged corruption was
known.
Mr. Montanari said a "material delay" in the release of
Petrobras' audited 2014 results could give some holders of
Petrobras' bonds the right to demand immediate payment.
"In that case, we believe one of the solutions could be a new
equity issuance, which could be very dilutive," Mr. Montanari
said.
Petrobras executives said at a news conference this month that
the company has enough cash on hand to fund its operations and
investments for at least six months.
The corruption investigation has come at a bad time for Brazil.
The country's economy fell into recession in the first half of the
year, while inflation remains above official targets. Ratings firms
have sounded alarms saying that Brazil could lose its investment
grade if the government fails to improve its fiscal situation.
Andbank's Mr. Gribel said the indefinite delay of Petrobras'
earnings release sparked a wave of selling of the company's
bonds.
"There is a lot of disappointment related to Brazil right now,"
Mr. Gribel said. "First, with the re-election of President Dilma
and now with Petrobras."
Write to Luciana Magalhaes at Luciana.Magalhaes@dowjones.com and
Paul Kiernan at paul.kiernan@wsj.com
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