Bloomberg News

Lupatech Surges as Talks With BNDES Bank Allay Default Fears

November 27, 2011

(Updates to add company comments in third paragraph, closing share price in seventh paragraph.)

Nov. 25 (Bloomberg) -- Lupatech SA shares surged the most in three years and bonds rallied from lows after Brazil’s state development bank said it’s seeking to assist the oil-services provider that ratings companies say is at risk of default.

Lupatech’s third-largest shareholder, the state bank known as BNDES, said in a statement today it’s seeking “market alternatives” to strengthen the company’s finances, sending the stock up as much as 24 percent, the most since October 2008. Lupatech’s 9.875 percent, perpetual bonds rose 8.5 cents to 45 cents on the dollar as yields fell 510 basis points, or 5.1 percentage points, to 21.95 percent.

Yields surged above 27 percent this week on speculation a default by the Caxias do Sul, Brazil-based company was imminent after the company said it would seek bondholder consent to amend covenants on the debt. Lupatech has always made interest payments on its debt and will continue to do so, the company said today in a filing with the stock exchange.

“The main shareholders are trying to keep Lupatech on stream because the oil industry has difficulties finding the companies to fulfill the local content requirements,” said Lucas Brendler, who helps manage about 7 billion reais ($3.7 billion) at Banco Geracao Futuro de Investimentos in Porto Alegre, Brazil.

Lupatech’s funding options are dwindling amid a slump in earnings and delayed orders from its biggest client, state-run oil producer Petroleo Brasileiro SA.

Amending Covenants

Lupatech made 17 acquisitions from 2007 through 2010 in anticipation of new business stemming from the Western Hemisphere’s largest oil discoveries in about three decades off the coast of Rio de Janeiro state. The company said in a statement this week it’s seeking to amend covenants on dollar debt as it prepares to sell a unit that guarantees the notes.

Luptech climbed 13 percent to 3.88 reais in Sao Paulo, paring the weekly decline to 42 percent.

Moody’s Investors Service cut the company’s credit rating one level to Caa2 on Oct. 19, which implies a 29 percent chance of default within a year and is nine levels below that of Brazil. S&P rates Lupatech’s bonds CCC, eight levels below investment grade.

BNDES is looking to help Lupatech implement its investment plans as part of a policy to expand the domestic oil services industry, according to a BNDES e-mailed response to questions. Lupatech confirmed the talks in a regulatory filing. BNDES owns about 11 percent of Lupatech.

‘Strengthen’ the Chain

“This makes sense for the bank because one of our strategic goals is to strengthen the supply chain for the oil and gas sector,” the bank said.

Lupatech has a “strong position” in Brazil’s oil and gas industry as the largest domestic oil equipment and services provider as the country plans to more than double production by 2020, the company said.

“There’s the impression that the BNDES will help the company get out of this situation and avoid a default,” Erick Hood, an analyst at SLW Corretora brokerage, said in a telephone interview from Sao Paulo. “There’s space for the stock to rise more, but it should remain volatile.”

Chief Executive Officer Alexandre Monteiro said Nov. 11 the Petros pension fund for Petrobras workers, Lupatech’s second- biggest shareholder, will lend it 60 million reais to help finance investments and pay debt.

“The BNDES in the past has supported companies where they have stakes,” Siddharth Dahiya, a credit analyst at Aberdeen Asset Management in London, said in a telephone interview. “We wouldn’t be surprised if they do it again.”

--With assistance from Taís Fuoco in Sao Paulo. Editors: Robin Saponar, Dale Crofts

To contact the reporters on this story: Peter Millard in Rio de Janeiro at pmillard1@bloomberg.net; Gabrielle Coppola in New York at gcoppola@bloomberg.net

To contact the editor responsible for this story: Dale Crofts at dcrofts@bloomberg.net


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