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Lupatech Bond Yields Surpass 25% as S&P Sees Chance of Default

December 06, 2011

Nov. 23 (Bloomberg) -- Lupatech SA’s bonds tumbled, sending yields above 25 percent for the first time, as a plan by Brazil’s largest oil-services and equipment provider to amend debt covenants heightened concern it may default.

The Caxias do Sul, Brazil-based company’s $275 million of 9.875 percent senior unsecured perpetual bonds fell 11.6 cents to 36.5 cents on the dollar at 4:23 p.m. in Sao Paulo, sending yields up 651 basis points to 27.04 percent. Shares dropped 19 percent to 4.67 reais, set for the lowest close since May 2006.

Lupatech said in a statement today that it is seeking bondholder consent to remove a guarantee on the debt as it prepares to sell the Steelinject Injecao de Acos unit that guarantees the notes. Paula Martins, a Standard & Poor’s analyst, said in an interview the company may default in the next 12 months, while Moody’s Investors Service’s Filippe Goossens said the likelihood of a restructuring “is significant.”

“The liquidity is really a concern because they have a very high refinancing risk,” Martins said. “This company has acquired a lot of other companies in the past through debt, and they’ve had difficulty incorporating these companies into their business, leading to very high fixed costs and low margins.”

Steelinject Sale Plan

Lupatech said Oct. 13 it may sell Steelinject to Forjas Taurus SA for 14 million reais ($7.5 million). Lupatech, whose cash flow was enough to cover only about 36 percent of its interest expenses in the past year, is selling assets after its biggest client, Petroleo Brasileiro SA, delayed orders in the past three years.

Steelinject represents less than 1 percent of the company’s 1.5 billion reais worth of total assets, Lupatech said in a statement today.

“Permission to sell Steelinject will allow the sale of this asset to conclude without hurting the guarantees to perpetual bondholders,” the company said. “Additionally, it will help strengthen the company’s cash flow.”

The debt is rated Caa3 by Moody’s Investors Service, nine steps below investment grade, and one step higher at CCC by S&P.

“A company like this, that’s been given such a good hand - - oil services in Brazil as a Brazilian company -- I don’t understand how they messed that up,” said Bevan Rosenbloom, a credit strategist at Citigroup Inc. in New York. The move to sell assets “is a step in the right direction,” he said.


The company’s long-term debt equaled 54 percent of its capital in the third quarter, higher than about 89 percent of its global peers in the oil-equipment and services industry, according to data compiled by Bloomberg. Earnings before interest, taxes, depreciation and amortization, a measure of cash flow known as Ebitda, equaled 36 percent of its interest expenses in the year through the third quarter.

Lupatech’s capital structure and liquidity are “not sustainable,” Goossens said in a telephone interview. “The likelihood of a restructuring is significant.”

Lupatech said the consent solicitation started today and will expire at 5 p.m. New York time on Dec. 13. Bondholders who grant consent will receive a cash payment of $2.50 for each $2,000 of principal.

While Lupatech’s asset sales may generate 150 million reais to 200 million reais, that’s “not enough for the company’s solvency,” Auro Rozenbaum, an analyst at Banco Bradesco SA, wrote in a note to clients today.

The company may also be considering selling shares, Rozenbaum said.

“We expect it to come out with a capital contribution solution or capital restructuring soon,” he said. “In our understanding, a capitalization is about to be announced, and we expect no less than 200 million reais to 250 million reais.”

--With assistance from Jessica Brice, Gabrielle Coppola and Katerina Petroff in Sao Paulo. Editors: Richard Richtmyer, Glenn J. Kalinoski

To contact the reporters on this story: Drew Benson in New York at; Boris Korby in New York at

To contact the editor responsible for this story: Adriana Arai at

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