OGX Petroleo & Gas Participacoes SA (OGXP3)’s bankruptcy protection filing in Latin America’s largest corporate default is dimming the prospect holders of the world’s worst-performing bonds will recoup their ill-fated investment in Eike Batista’s oil ambitions.
OGX, which transformed Batista into Brazil’s richest man, submitted documents in a Rio de Janeiro court yesterday, culminating a 16-month decline that wiped out more than $30 billion of his fortune and left holders of $3.6 billion of the company’s bonds with losses of as much as 89 percent. OGX has total obligations of 11.2 billion reais ($5.1 billion).
The move marks the latest chapter in Batista’s demise as poster child for Brazilian entrepreneurialism. First, the Rio businessman raised billions of dollars in equity markets to fund OGX’s drilling program and other commodities startups. He then tapped debt markets, gaining bond investors including BlackRock Inc. (BLK:US) and Pacific Investment Management Co. When some of the deposits he’d valued at $1 trillion turned out to be duds, OGX lost 98 percent of its value and ran out of cash.
“You have to assume bondholders are at the bottom of the cash waterfall,” Omar Zeolla, a corporate credit analyst at Oppenheimer & Co., said in a telephone interview in New York. “The problem now is the time it might take.”
The bankruptcy protection process will put $3.6 billion of dollar-denominated bonds into default. The 2018 notes plunged 89.6 cents this year and are the worst-performing notes globally with more than $500 million outstanding, according to data compiled by Bloomberg. The company’s $1.06 billion of 2022 notes have fallen 75.6 cents on the dollar in the period.
Michael Reid, a spokesman for Newport Beach, California-based Pimco, and Melissa Garville, a spokeswoman at BlackRock in New York, declined to comment. An official at OGX’s press office, who isn’t an authorized spokesperson, also declined to comment on the court proceedings.
Yesterday’s filing, called a judicial recovery in Brazil, follows months of negotiations as OGX sought debt relief from its creditors. OGX wanted to convert debt into equity and obtain as much as $500 million in new funds. OGX said Oct. 29 that the talks concluded without an agreement. The company’s cash dwindled to about $82 million at the end of September, not enough to sustain operations past December.
Restructuring talks were complicated by OGX’s cash burn and need to fund testing of its most promising oil field, Tubarao Martelo.
The oil company missed a $45 million payment on Oct. 1, prompting Standard & Poor’s to assign a default rating to $1 billion of bonds. Moody’s Investors Service and Fitch Ratings are giving OGX the 30-day grace period before calling a default. That period expires today.
Hours before filing for bankruptcy protection, OGX sold its only producing asset, reducing the money bondholders and other creditors could recoup if the company’s assets are sold in a liquidation, according to Oppenheimer’s Zeolla.
While Batista is yet to decide, his shipbuilding company OSX Brasil SA (OSXB3) probably will also seek protection against creditors, said a person with direct knowledge of the plans.
By filing for bankruptcy protection, OGX risks having the country’s oil regulator revoke its 30 oil and natural gas licenses in Brazil, according to Sao Paulo-based TozziniFreire Advogados, a law firm that has clients in the oil industry.
Reserves-auditing firm DeGolyer & MacNaughton said Oct. 3 that Tubarao Martelo may hold at most 108.5 million barrels of crude, less than half OGX’s estimate last year of 285 million. The field is worth $439 million assuming a long-term oil price of $95 a barrel, Bruno Montanari, an analyst at Morgan Stanley, said in a report dated Oct. 3.
Bondholders of OGX hired Rothschild Inc. in August to advise on restructuring talks, while OGX enlisted Blackstone Group LP (BX:US), Lazard Ltd. (LAZ:US) and Sao Paulo-based Angra Partners as advisers. Creditors of shipbuilder OSX hired law firm Bingham McCutchen LLP in preparation for the restructuring of $500 million in bonds, two people briefed on the arrangements said Sept. 9.
The bankruptcy of Centrais Eletricas do Para SA, or Celpa, provides an example of how difficult it is for bondholders to recover their investments in a Brazilian court, Jason Brady, who helps oversee $89 billion at Thornburg Investment Management Inc., said before OGX filed for bankruptcy.
Celpa, the largest power distributor in Brazil’s remote Amazon region, sought relief from creditors in February 2012, after fixed utility rates reduced earnings and debt surged. Bondholders received compensation of 17.5 cents on the dollar after the company was sold to Equatorial Energia SA.
“In the case of Celpa, the acquirer could offer better terms to the bondholder as the company continues to exist and thus there will be future cash flow generation,” Marco Aurelio de Sa, the head of fixed-income trading at Credit Agricole’s Miami brokerage, said by e-mail before the announcement. “In the case of OGX, the recovery rate will depend on whether or not the company will continue to exist.”
Batista, 56, started with a gold mine after returning to his native Brazil from Europe in the early 1980s. Riding a wave of investor appetite for commodities in the past decade, he listed six energy, mining and logistics startups since 2006 at the same time as advancing private projects from a Chinese restaurant in Rio to a semiconductors venture.
By March of last year he’d amassed a $34.5 billion fortune, the world’s eighth biggest.
After losing investors’ confidence with deepening losses and missed targets, Batista has been trying to keep his empire afloat by selling pieces of his companies and shrinking operations. EBX Group Co., Batista’s holding company, is moving out of its headquarters, a 23-story art deco building in downtown Rio, into smaller offices in Brazil’s second-largest city, two people with knowledge of the move said Oct. 2.
OGX has about 11.2 billion reais in debt mainly with bondholders and suppliers, according to a copy of the bankruptcy petition obtained by Bloomberg News. The company doesn’t have debt with banks or any back taxes and its labor claims are minimal, it said in the filing.
OGX was the centerpiece of the group with a market value that surpassed established producers including Repsol SA during its exploration period. Batista has struggled to save his empire since mid-2012, when OGX began missing targets. On Aug. 15, the company posted a record loss of 4.7 billion reais for the second quarter and last generated a quarterly profit three years earlier, according to data compiled by Bloomberg.
Shares of OGX, which Batista founded in 2007, lost 96 percent in the past 12 months, the worst-performing stock among 73 members of the Brazilian benchmark Ibovespa after investors sold shares on missed output targets. The stock will leave the benchmark Ibovespa tomorrow, the Brazilian exchange operator said in a statement.
Batista asked bondholders to convert $3.6 billion of debt into OGX stock, ceding control of the company and diluting existing shareholders to 10 percent of the stock, according to a September presentation posted on the company’s website Oct. 29. OGX released the presentations as part of an arrangement with bondholders after the failure of the restructuring talks.
Claims from suppliers amount to $546 million and OGX has delayed payments to sister company OSX. The unsecured creditors including bondholders and suppliers may be entitled to between $5.1 billion to $6.8 billion in payments, OGX said in a September presentation made by advisers Blackstone to note holders released as part of the negotiations.
OGX said Oct. 15 it fired Chief Executive Officer Luiz Carneiro amid negotiations with bondholders. Carneiro, who was replaced by Paulo Narcelio Simoes Amaral as OGX’s fourth CEO in 18 months, said in September that bankruptcy proceedings were a possibility and that Batista could lose control.
OGX, whose market value peaked at 75.2 billion reais in October 2010 without producing a barrel of oil, plummeted below 1 billion reais.
As of June 30, the last quarterly result reported by OGX, the company had 721.7 million reais in cash and total debt of 8.7 billion reais, according to data compiled by Bloomberg. An OGX default would be the region’s biggest, according to Moody’s.
“The day to day of the company continues full speed,” Sergio Bermudes, a lawyer representing Batista, said by telephone yesterday. “Obviously it will look to give more energy to its businesses and seek alternatives to reach a solution to its momentary difficulties.”
Shipbuilder OSX didn’t request protection, Bermudes said.
“When you increase your chips on the table too much, you can win or you can lose, he lost,” Marcelo Mesquita, who manages 700 million reais as founding partner of Leblon Equities (LEBLONG) in Rio, said by telephone. “After this entrepreneurs will have more difficulties with startups and selectiveness of projects will increase.”
The tycoon lost his title of Brazil’s richest in November and ceased to be a billionaire in July after Abu Dhabi’s Mubadala Development Co. converted an investment in Batista’s EBX into debt. The net worth of Batista, who until early 2012 was vowing to become the world’s richest person, fell below zero earlier this year as his companies’ stock prices plunged, according to the Bloomberg Billionaires Index.
OGX, which counted Ontario Teachers’ Pension Plan as one of its early backers, raised a record 6.7 billion reais in Brazil’s biggest initial public offering in 2008. The company targeted annual production of 18 million barrels of oil by 2013, or almost 50,000 barrels a day, according to its prospectus.
OGX didn’t produce any oil in September after it shut all three wells at the Tubarao Azul field on pump failures. It produced 2.1 million cubic meters of natural gas per day, equivalent to 13,200 barrels per day, from the stake of its fields in northeastern Brazil’s Parnaiba Basin. OSX is preparing to remove a production vessel from the Tubarao Azul offshore field after missed payments, it said on Oct. 29.
Batista said in an April 2010 video interview with brokerage XP Investimentos CCTVM SA that he was seeking to sell a 20 percent stake of OGX to improve valuation and visibility.
“We discovered a new oil province in Brazil, OK?” he said then. “OGX has now $1 trillion in oil value, oil in shallow waters that will have $8 lifting cost” a barrel.
While a deal didn’t transpire then, earlier this year OGX agreed to sell a 40 percent stake in two Brazilian blocks for $850 million to Malaysia’s Petroliam Nasional Bhd, or Petronas.
The transaction was suspended after the dismissal of CEO Carneiro, newspaper Valor Economico said yesterday, without saying where it obtained the information. The two companies probably will enter into arbitration proceedings to resolve the issue, OGX said today in a regulatory filing. Petronas spokesman Azman Ibrahim declined to comment on the deal status or the impact of OGX’s bankruptcy filing.
In a bid to keep his commodities group afloat, Batista in August hired private-equity and consulting firm Angra Partners to oversee a reorganization of EBX along with Grupo BTG Pactual. (BBTG11)
OGX is the biggest bankruptcy case since at least 2005 when Brazil passed new legislation for corporate failure and the company may be under protection for as long as four years given the judicial complexities, Sergio Emerenciano, a partner at law firm Emerenciano, Baggio e Associados, said by phone.
“They were asking creditors to put money in; it’s going to be tough to get that,” said Oppenheimer’s Zeolla. “Survival will depend on two main things: if the company can continue to operate and generate some cash and if they’ll be able to keep the licenses. We’ll probably know in the next few months.”
The filing was lodged in the Fourth Section of the Corporate Division of the Rio de Janeiro State Tribunal. The assigned judge is Gilberto Matos in case number 0377620-56.2013.8.19.0001
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