PBR Petroleo Brasileiro ADR

By Paul Kiernan 

RIO DE JANEIRO--Brazil's financially pressed state-controlled energy company Petróleo Brasileiro SA on Friday said it has signed a term sheet with China Development Bank to obtain loans worth $10 billion in exchange for supplying petroleum to Chinese companies.

The deal, details of which are still under discussion, was vaguely outlined during a May 2015 visit to Brazil by Chinese Premier Li Keqiang. At that time, Brazilian President Dilma Rousseff suggested the money could be used for drilling in the pre-salt geological formation, referring to large, ultra-deepwater oil deposits off Brazil's coast that Petrobras is struggling to develop.

Petrobras didn't comment further on the loan or about the company's intentions for the proceeds.

Saddled with the global oil industry's largest debt burden, Petrobras has grown increasingly strapped for cash as oil prices have fallen to their lowest in more than a decade. The company's strategy to pay down its debt has so far hinged on raising more than $14 billion through asset sales this year, at a time when oil companies around the world are doing the same.

Eager for natural resources, China has become a familiar lender to Latin America in recent years, using its state banks to offer loans to distressed companies and governments that have been shut out of private debt markets.

Petrobras dollar bonds maturing in 2020 are trading at just 75 cents on the dollar, reflecting investor doubts about the company's ability to repay creditors. The bonds have been downgraded to so-called junk status in recent months alongside the Brazilian government, which itself has racked up a large budget deficit and a substantial debt load.

On Feb. 24, Moody's Investors' Service became the latest credit-ratings firm to downgrade Petrobras, noting the company has about $23 billion in debt maturing this year and next. And of the $25 billion in cash holdings reported in September, Moody's says Petrobras will likely need $8 billion to $10 billion for its day-to-day operations.

"Free cash flow will remain negative in the foreseeable future," Moody's said. "Although Moody's recognizes that the company's has attractive valuable assets, execution of the sale program as planned may be difficult under current global industry conditions and Brazil's economic and political situation."

Write to Paul Kiernan at paul.kiernan@wsj.com

(END) Dow Jones Newswires

February 26, 2016 18:51 ET (23:51 GMT)

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