Bondholders are increasing pressure on Brazilian billionaire Eike Batista to raise outside money for his oil producer, pushing up borrowing costs to levels associated with companies on the verge of collapse.
After surging to more than 11.6 percent last week, yields on $2.56 billion of notes due 2018 issued by OGX Petroleo & Gas Participacoes SA ended Feb. 22 at 11.06 percent following a report by Sao Paulo-based newspaper Valor Economico that Batista is in talks to sell a stake in OGX to Malaysia’s state energy company. Company officials declined to comment on the report.
OGX’s cash hoard dropped 23 percent in the six months through September to 5.1 billion reais ($2.56 billion) as subpar production at its first two oil wells put output goals out of reach. Bonds of OGX, which will run out of cash in less than two years at its current burn rate, have suffered even after Batista said in October that he would pump $1 billion of his own money into the company that he founded in 2007.
“The roller coaster ride of these bonds is pretty dramatic, to say the least,” Ian McCall, who manages $107 million in emerging-market assets at Quesnell Capital SA in Geneva and holds OGX bonds, said in a telephone interview. A stake sale to Malaysia’s Petroliam Nasional Bhd., the state producer known as Petronas, “is the logical ending for this situation.”
OGX said in a Feb. 22 statement to Brazilian regulators that it had no transactions to inform the market of at the moment.
Azman Ibrahim and Ridzuan Zulkifli, spokesmen for Petronas, didn’t respond to e-mail messages seeking comment sent after normal office hours in Kuala Lumpur.
OGX’s 8.5 percent 2018 bonds, rated B by Standard & Poor’s, or five levels below investment grade, pay 0.44 percentage point more than global bonds rated CCC and lower that S&P says are currently vulnerable to nonpayment, according to data compiled by Bloomberg and Bank of America Corp.
Batista lost his place among the world’s 100 richest people this month after Rio de Janeiro-based OGX, the biggest of his commodities businesses that include shipbuilder OSX SA and coal producer CCX Carvao da Colombia SA, lost more than 80 percent of its market value in the past 12 months as oil production and free cash flow fell short of estimates.
Batista has a net worth of $10.4 billion, according to the Bloomberg Billionaires Index. The commodity mogul, whose EBX Group Co. controls six publicly traded companies, aims to raise as much as $5 billion selling stakes in electricity producer MPX Energia SA and closely held gold mining startup AUX, a person with direct knowledge of the matter said Feb. 19.
A lack of access to international capital markets may make stake sale or partnership the best option for Batista to raise money for OGX, according Omar Zeolla, an analyst at Oppenheimer & Co. in New York.
No Brazilian company has issued bonds overseas paying more than 11 percent since Minerva SA sold $350 million of securities to yield 12.625 percent in February 2012, according to data compiled by Bloomberg. (MMXM3)
Batista “was very popular a few years ago,” Zeolla said in a telephone interview. “People have lost faith. It would be very difficult for OGX to come to the market now.”
Turning to Asia
Batista turned to Asian investors to raise capital on three previous occasions. China’s Wuhan Iron & Steel Co. is the second-biggest stakeholder in Batista’s miner MMX Mineracao & Metalicos SA, followed by South Korea’s SK Networks Co., according to data compiled by Bloomberg. South Korea’s Hyundai Heavy Industries Co. holds a stake in OSX and is a partner in the company’s shipyard unit. He also sold a 5.6 percent stake in EBX to Abu Dhabi’s Mubadala Development Co.
For investors disenchanted with OGX’s failures to meet production and cash-flow projections, a partnership with Petronas wouldn’t be enough to make the company attractive, according to Cornel Bruhin, a money manager at MainFirst Schweiz AG, which manages about $4.2 billion of emerging-market debt. The company pumped 9,100 barrels of oil per day in the third quarter after abandoning its original production goal of 40,000 barrels a day June 26.
“If he sells 25 percent or 75 percent, it doesn’t change that we lost faith” in Batista, Bruhin said in a telephone interview from Zurich.
The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries narrowed four basis points, or 0.04 percentage point, to 167 basis points at 9:22 a.m. in New York, according to JPMorgan Chase & Co data.
The cost to protect Brazilian bonds against default for five years dropped two basis points to 124 basis points. Credit- default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements.
The real strengthened 0.3 percent to 1.9665 per dollar. Yields on interest-rate futures contracts due in January 2014 climbed seven basis points to 7.9 percent.
OGX needs to abandon its strategy of developing unproven oil fields without any partners to share the hazards and expenses before investors will embrace the company’s bonds, according to Quesnell’s McCall. The notes may rally about 10 cents to 100 cents on the dollar if the company announces a partnership, he said.
“It’s a risky business and people diversify the risk by bringing in partners, so this will be the logical outcome at some point in time,” McCall said.