OGX Petroleo & Gas Participacoes SA defaulted on $1 billion of bonds after missing an interest payment, accelerating former billionaire Eike Batista’s slide toward Latin America’s largest-ever corporate debt debacle.
The oil company missed a $45 million payment on dollar notes due 2022, Rio de Janeiro-based OGX said in a regulatory filing today. The decision prompted Standard & Poor’s to assign its default rating to the company and the bonds while Moody’s Investors Service and Fitch Ratings said they’d give OGX the 30-day grace period before calling it a default.
Batista, once Brazil’s richest person, is seeking to renegotiate debt and avoid bankruptcy after some offshore deposits he’d valued at $1 trillion turned out to be duds. That triggered a selloff that wiped out $30 billion of his fortune and pushed down bond prices to 16.5 cents on the dollar.
“We do not expect the company to pay the interest due within the five-business-day cure period established by our criteria, and we believe this indicates a general default and that the company will restructure its debt,” S&P analysts Renata Lofti and Luciano Gremone said in a statement today. “This is based on OGX’s virtually null cash flow.”
S&P cut OGX’s corporate rating and the 2022 notes to D from CCC- and lowered $2.56 billion in bonds due 2018 to CCC- from C, saying a December payment probably won’t be made.
Batista fired his chief financial officer and hired his fifth restructuring adviser in the past two weeks. The 2018 notes have tumbled 5 cents since Sept. 20, when it announced the departure of Roberto Monteiro, who had led negotiations with creditors. Four days later, the company hired Lazard Ltd. (LAZ:US) to work alongside advisers including Blackstone Group LP (BX:US) in the talks.
If OGX can’t convince creditors or other partners to provide debt relief and an immediate infusion of funds, bondholders may end up with nothing, JPMorgan Chase & Co said.
Chief Executive Officer Luiz Carneiro said Sept. 13 that the company was considering asking bondholders for more cash as it seeks to avoid having to file for bankruptcy protection.
As of June 30, OGX had 722 million reais ($327 million) in cash and equivalents and 8.7 billion reais in total debt, including $2.6 billion of notes due 2018. A default of the $3.6 billion international bonds would be the region’s biggest corporate default, according to data compiled by Moody’s. OGX would enter default on the last day of the grace period if no payment is made, Moody’s analyst Gretchen French said in an e-mailed reply to questions.
The producer was set to run out of money by early September based on its burn rate through the end of the second quarter, according to data compiled by Bloomberg.
“It’ll be challenging to convince anyone to come in at a debt level and put more money into this,” Daniel Kastholm, a managing director at Fitch Ratings in Chicago, said by phone today.
OGX precipitated today’s decision last week when it said it would postpone payments on 2.1 billion reais of local bonds held by its OGX Austria unit. The unit agreed to delay a Sept. 25 payment for an undisclosed amount until March 25, OGX said in a regulatory filing.
“According to the bond indenture, OGX has a 30-day period to make such a payment without causing debt acceleration,” the company said in today’s statement.
Fitch probably won’t downgrade OGX to a D, or default rating, until the 30-day grace period expires or it files for bankruptcy protection, Kastholm said. He expects negotiations with bondholders to continue during the grace period.
“There’s going to be an ongoing discussion and, as has traditionally been the case in many of these scenarios, the likely way to restructure has typically been an out of court settlement,” he said.
It would be detrimental for bondholders if OGX seeks bankruptcy protection in Brazil because the process will be prolonged and the government could take away exploration and production licenses, leaving the company with no assets, said Omar Zeolla, a corporate credit analyst at Oppenheimer & Co. in New York.
“Hopefully it can be settled out of court,” Zeolla said by telephone. “It depends on how negotiations have been going between the company and creditors.”
Brazilian officials have said the government doesn’t plan to bail out OGX.
“The solution has to come from the market,” Finance Minister Guido Mantega told reporters in Sao Paulo yesterday. “I hope they manage to stop the bleeding. The OGX situation has already caused a problem for the country’s image.”
If OGX goes into bankruptcy proceedings, the country’s oil regulator could revoke its exploration and production concessions, according to information on the National Petroleum Agency’s website. Talks with bondholders have been complicated because the explorer needs money to test production at its most promising field, Tubarao Martelo.
OGX made bad bets on carbonate reservoirs off the coast of Rio state that are formed from ancient reefs deeper in the earth’s crust than the traditional sandstone reservoirs where state-run Petroleo Brasileiro SA (PETR3) has been producing for decades. The geology proved more compartmentalized than expected, hindering the flow of oil and prompting OGX to announce in July it would abandon a group of fields it had previously declared commercially viable.
The company expects better results at Martelo, also a carbonate reservoir, where it has drilled six wells and plans to start producing before the end of the year, according to information on its website.
CEO Carneiro said last month that OGX is trying to convince Petroliam Nasional Bhd., the Malaysian company that agreed to buy a 40 percent stake in Martelo in May, to begin payments on the deal worth $850 million before restructuring is completed.
OGX’s concessions are worth $1.9 billion, of which Martelo is worth $1.1 billion, Credit Suisse Group AG said in a Sept. 6 note to clients. OGX moved a production vessel to Martelo, sister company OSX Brasil SA said in an e-mailed reply to questions today.
“Any lender would have to be extremely confident to be willing to pony up,” Fitch’s Kastholm said. “The only reason they would do it is if they are confident the company could monetize Martelo and reduce their economic losses.”
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