Petrobras, Braskem plunge after Lula's election upset in Brazil

What happened

Petrobras and Braskem fell 17.8% and 38.8% in early Monday trading after leftist Luiz Inacio Lula da Silva won Brazil's presidency, surprising investors who had positioned for the opposite result, according to the article.

Confirmed

Global impact / market context

Brazil's government is Petrobras's controlling shareholder, so Lula's win raises the chance of state intervention in fuel prices, subsidies, taxes, and dividends, which can reduce Petrobras's profit and cash available to shareholders.

Analyst inference

Investors had favored the right-wing contender because of promises of fiscal consolidation, privatization, and pro-business reforms, which means the upset reverses that positioning and pressures Brazilian assets tied to government policy.

Analyst inference

What to watch

1. Braskem's creditors and shareholders are working on a deal to rework $11B of debt, with proposals pointing to a follow-on equity offering and a simultaneous debt-to-equity swap by creditors. Confirmed
2. Watch whether Braskem's company and creditor proposals for a follow-on equity offering with a capital injection from main shareholders and third parties, plus a debt-to-equity swap, move forward. Proposed
3. Watch whether Lula's government changes Petrobras's fuel price controls, subsidy obligations, taxation, or dividend policy, since these decisions can directly affect Petrobras's revenue, costs, and cash available. Analyst inference

Evidence

• seekingalpha.com