Already grappling with one of Brazil’s most severe outbreaks of the novel coronavirus and a budget deep in the red, Rio de Janeiro state faces a potential threat to its solvency at the hands of investment giants PIMCO and Dodge & Cox.
The U.S. asset managers have the right to a 2.5 billion real (US$ 470 million) accelerated loan repayment in mid-May from Brazil’s third-largest state, known for its dramatic coastal capital and royalties from the oil industry.
The state, whose public hospitals are nearing capacity as they treat over 4,500 confirmed cases of the coronavirus, faces an estimated US$ 3 billion in lost revenue this year, partly from a broad plunge in tax intake stemming from quarantine measures and in part due to lost revenue from oil, its key industry.
Royalty payments from oil producers operating off Rio’s coast, including state-run behemoth Petroleo Brasileiro SA, were supposed to secure the loans, of which the first installment was extended in 2014.
While the loans do not mature for years, PIMCO and Dodge and Cox have the option of demanding early payments if crude dips below US$ 40 per barrel. For over a month, Brent has been trading at under US$ 35 as demand has fallen off a cliff amid worldwide stay-at-home orders, while some contracts for West Texas Intermediate, the benchmark U.S. crude, have gone negative.
That has put the mega-state of over 16 million people in a tight spot. Rio’s situation reflects the cruel dilemma of many oil-dependent governments, which are seeing revenues plummet as social spending soars amid widespread unemployment and stressed public health systems.
“Because of the loans, in addition to a very large drop in revenue, we’re facing an increase in expenses,” said Rio finance minister Luiz Claudio Rodrigues de Carvalho, who is negotiating with the funds in a bid to keep them from demanding immediate payment.
Elsewhere in Latin America, Colombia’s director of public credit said the country may have to take out more multilateral loans than previously expected as revenue dries up.
Last week, oil-reliant Ecuador, where the virus has overwhelmed public services, reached a deal to delay interest payments on nearly US$ 20 billion of sovereign bonds. Nine Latin American countries are expected to receive emergency funds from the World Bank or International Monetary Fund.
In Rio, Carvalho said he is optimistic about reaching a deal with the U.S. funds, which have shown an eagerness to negotiate. He added that the state believes the current terms of the loans are attractive to the funds in the long-term.
Among the possibilities being floated is a 12-month delay in any early repayment. But, Carvalho added, once a deal is reached, more measures will be needed.
Rio is also considering negotiating a delay in a 3.9 billion real payment owed on another loan, from French bank BNP Paribas SA in December, and the state is set to attempt an initial public offering of its water utility this year, Carvalho said.