Petroperu: Sovereign support to continue despite claims of lack of budget space

News Analysis 27 October

Petroperu: Sovereign support to continue despite claims of lack of budget space

by Mariana Santibanez

PetroPeru (B+/BB+) is expected to continue to receive support from Peru’s (BBB/Baa1/BBB) government, despite comments that there is no budgetary space for new financial support to the state-owned oil company this year, according to a corporate and sovereign analyst.

With a debt burden of USD 6bn as of June 2023, PetroPeru is seeking an additional USD 3.2bn from the government. Prime Minister Alberto Otarola stated publicly last month that the sovereign has communicated to PetroPeru executives that no additional funds will be provided.

“The timing of the comments was very poor,” the corporate analyst said. “There’s a lot of political context in that message, but we believe the government expects the company to do its homework right instead of asking for money each time they’re short. It’s a delicate balance, but we don’t expect the government to allow for a potential default.”

Higher costs for the Talara refinery work and financial assistance from the government have resulted in higher debt for PetroPeru, while the company still seeks to set up new funding sources to stabilize liquidity, which will further weaken its capital structure, S&P wrote in a 12 October report.

An EBITDA generation expectation of around USD 450m for 2024 would not be enough to cope with interest burdens of at least USD 300m, USD 144m in payments to Spanish export lender Compania Espanola de Seguros de Creditos a la Exportacion (Cesce), USD 750m in repayments to Peru’s Ministry of Finance (MEF), and capex of USD 400m-USD 450m, the agency wrote.

In the event of a PetroPeru default, oil supplies would have to be paid for in cash, causing fuel disruptions, the corporate analyst said. “That’s not a scenario that the government would allow,” this analyst said.

PetroPeru has a USD 72m principal payment due in December on the Cesce loan, an amount the company barely has, PetroPeru ex-president Cesar Pena told Debtwire.

“If the MEF doesn’t help PetroPeru they’d enter into a default,” Pena said. “That payment is in two months, but my impression is that Ministry of Finance will provide short-term financing to deal with the December payment.”

Peru has a public deficit target and has already breached that target, and the government has no more room to take money out of the treasury to put anywhere else, let alone a contribution to a money losing company like PetroPeru, former PetroPeru CFO Fernando De la Torre told Debtwire.

“They are saying if they don’t get the money they’ll have to shut down and the country will be out of fuel,” De la Torre said. “PetroPeru used to have around 50% market share, but right now they are at 26% market share, so basically, you can say who cares if they disappear.”

A looming question is whether the Peru sovereign would bend the fiscal rules, especially in 2024, to fund a company that is losing money and that has already lost a lot of market share, De la Torre said.

A Ministry of Finance official did not respond to a request seeking comment.

PetroPeru nevertheless has internal funds it could tap into to meet the December payment, a PetroPeru official told Debtwire.

“We don’t know why the government made those comments, but negotiations [with the government] are on track for possible short-term financing, and not a capital injection,” the official said.

As of 30 June, PetroPeru reported a cash balance of USD 141m, according to its financial statements.

PetroPeru officials and the government are discussing the best tools available to help the state-owned oil company in the short-term, the corporate analyst said.

“The USD 3.2bn [request] is an obscene amount of money, but it was a package of different tools and alternatives,” the corporate analyst said.

Peru faces reputational risk in event of PetroPeru default

Looking at the fiscal strength of the Peru sovereign, it has the capacity to support the state-owned oil company and could face reputational risk if it allows PetroPeru to default, the sovereign analyst said.

“There’s a deficit ceiling that is imposed by the fiscal rule, and that deficit ceiling is 2.4% of GDP for this year,” the sovereign analyst said. “Because of the weak tax revenues from weak economic activity, the sovereign is already starting to run against that deficit ceiling. If they were to provide support to PetroPeru – they would exceed the ceiling and [the financing] would need to be approved by congress. They don’t want to exceed that deficit ceiling.”

If the MEF were to provide any support, it would want something back, potentially either more control with the PetroPeru board or other conditionalities, the sovereign analyst said.

“For now, there is no appetite to help them this year,” the sovereign analyst said. “Next year, they might have more space within the fiscal rules to support them, but then the government may want something in exchange. It is not going to be a free lunch if support does come next year. There are questions if support will come this year.”

In the meantime, the market will be paying attention to developments regarding government support and there are expectations, according to the corporate analyst, that PetroPeru will start seeing normalized EBITDA generation in November and December, he said.

“If EBITDA normalizes, we could start seeing bilateral facilities, which are currently unavailable, start becoming available,” the corporate analyst said. “That would help restore the limited liquidity that the company has.”

PetroPeru’s USD 1bn 4.75% 2032 last traded at 66.64, and the USD 2bn 5.625% 2047 bond traded at 54.92, according to Debtwire data.

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