(Bloomberg) -- Bonds from Peru’s state-run oil company have become ensnared in a government power struggle that’s delayed a critical audit and led the chief executive officer to quit, sending prices for the securities tumbling.

Petroperu SA’s benchmark notes extended declines Monday following the announcement over the weekend that the CEO had resigned, bringing their losses this year to some 20%. That makes them among the worst performing Latin American corporate bonds in 2022, according to Bloomberg’s Emerging Markets LatAm Index.

The root of Petroperu’s problems stem from a dispute between the company and the government comptroller over completing an audit of its 2021 financial statement. Fallout from the disagreement has led auditor PricewaterhouseCoopers to refuse to sign off on the report, meaning that a May 31 deadline to publish the annual statement won’t be met. Fitch Ratings and S&P Global Ratings have downgraded the company’s debt in response.

Busting the deadline would trigger an event of default under the terms of the bond, so the company has said it intends to reach out to holders to secure a waiver. Petroperu says it’s in talks with international banks to begin the process of getting bondholders to push back the deadline. Investors are largely confident a deal will be reached.

“Petroperu will need to get an audit completed to access the markets, which will take a few months,” said Roger Horn, a senior analyst at SMBC Nikko Securities in New York. “But nobody is going to drive them into a default over the delay.”

Petroperu, President Pedro Castillo and the former CEO, Hugo Chavez, have been named in investigations by prosecutors that allege irregularities focused on tenders to secure supplies of biodiesel that included meetings at the presidential palace. 

Amid the allegations, the comptroller’s office delayed assigning an auditor to the company at the end of last year. The comptroller has re-opened the process to find a new auditor, which could take several weeks.

PwC said in an emailed statement that it decided to not do the audit because it wouldn’t have been possible to complete the work before the deadline, given Petroperu had recently appointed a new head accountant.

Petroperu says other auditors are ready to complete the work. Fernando de la Torre, who was tapped as the interim CEO late Monday, said in a phone interview on March 15 in his capacity as financial manager, that the company is in talks to hire advisers to obtain creditor approvals and will publish the documents by August. 

“We’re going to publish them late, but this is due to something out of Petroperu’s control,” he said.

The issues at the company have become front-page news in the Andean country. After a March 16 shareholder meeting, the Finance Ministry declined to express support for Petroperu’s board or administration. The Energy and Mining Ministry, meanwhile, called for the board’s full support. Even the central bank president got drawn into the situation last week, lamenting the concern bondholders have about a state-run company.

Overblown?

Despite the sell off, some analysts think the dispute has been blown out of proportion. Few investors think the government will allow the company to default and creditors will likely grant waivers to publish the financial report at a later date once a new auditor is hired.

“They should do this in a reasonable time frame, because the company absolutely needs access to financing,” said Victor Diaz, managing director of Credicorp Capital Services in Lima. “If they delay any longer, they could be held in non-compliance, and that cuts off the company’s access to banking and capital markets.”

The chaos at the oil company comes as Peru’s congress attempts to impeach Castillo for the second time since taking office. He’s been summoned to defend himself in front of lawmakers on March 28.

That could further complicate management at the state-owned company, which has become a political football, S&P Global analysts including Gaston Falcone wrote in a report this month when the rating was cut to BB+ from BBB-. 

“We consider this event as a clear sign of Petroperu’s weakening governance,” Falcone wrote. 

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