Not even Andre Esteves, the Brazilian billionaire who orchestrated a sixfold increase in the value of a discarded UBS AG investment-banking unit, can save Eike Batista’s crumbling empire, according to bond traders.
OGX Petroleo e Gas Participacoes SA’s $2.6 billion of bonds due 2018 fell 12.02 cents to an unprecedented 81.07 cents on the dollar in the past two weeks, wiping out a record gain on March 7 when Batista announced Esteves’s Grupo BTG Pactual would help manage the finances of his six publicly traded companies and people with knowledge of the deal said BTG also offered a $1 billion credit line. Yields soared 3.48 percentage points to 13.71 percent, which is 5.17 percentage points more than the average for Latin American single-B notes.
Batista, who lost $25 billion of personal wealth tied to his companies in the past year as OGX (OGXP3) cut production goals, faces demands from creditors to boost collateral as confidence fades in his ability to generate cash, people familiar with the matter said. The deal with Esteves, who turned a $2.5 billion investment into a bank with a market value of $15.4 billion, wasn’t enough to assuage concern over OGX’s viability, according to Credit Agricole SA.
“Even with the good news of Esteves, they need much more than $1 billion,” Luiz Campos, a money manager at Dinosaur Securities LLC, which oversees $800 million, said in a telephone interview from Sao Paulo. Batista “needs to prove that he can generate cash flow.”
BTG Pactual officials declined to comment on the bank’s agreement with EBX Group Co., the holding company of Batista that includes OGX, according to an e-mailed statement.
“EBX Group’s companies have the necessary funding established for the coming years and are always looking to improve the profile of its indebtedness,” the company said in an e-mailed statement. The company said it’s always evaluating the “best alternatives” to maximize value to all stakeholders.
OGX said on March 11 that crude output at three offshore fields in the Campos Basin decreased 14 percent in February, the latest in a series of production reports that disappointed investors. Bond prices fell the most on record.
Esteves, who runs Brazil’s most profitable bank, joined former partners in 2009 to buy UBS’s Brazilian investment bank, UBS Pactual, at a 19 percent discount to the $3.1 billion they had sold it to the Swiss bank for in 2006. The value of the investment bank, now known as Grupo BTG Pactual (BBTG11), has soared after 44-year-old Esteves, Brazil’s youngest self-made billionaire, used acquisitions to help triple assets under management.
As part of the agreement with Batista, BTG provided a $1 billion credit line to EBX, the parent company of six publicly traded companies controlled by Batista. The 56-year-old lost his place among the world’s 100 richest people last month and is close to selling a stake in power generator MPX Energia SA amid creditors’ demands for more capital, according to people familiar with the matter, who declined to be identified because the matter is private.
OGX shares have fallen 85 percent in the past year and 79 percent since they were first issued in June 2008. OSX Brasil SA, Batista’s shipping company, is down 65 percent in the past year. CCX Carvao da Colombia SA, a coal producer, has tumbled 53 percent since its initial public offering in May. MPX has fallen 23 percent in the past 12 months.
OGX’s cash dropped 23 percent in the six months through September to 5.1 billion reais ($2.6 billion) as oil production stayed below target. The company is set to run out of money in less than two years at the current burn rate, data compiled by Bloomberg show.
Investors may be underestimating Batista’s ability to raise financing for his projects, according to Jack Deino, a money manager who oversees about $1.8 billion in emerging-market debt at Invesco Ltd. in New York.
The Esteves partnership shows that “Batista not only has very deep pockets, but is very well positioned in the business community,” Deino said by telephone. “Don’t write off Eike Batista just yet. He has an ability to sell the story.”
Batista is also seeing greater success with his logistics company, LLX Logistica SA, which has rallied 16 percent in the stock market in the past month. Batista is using LLX to create an oil-services port to target a looming infrastructure shortfall created by Brazil’s offshore energy boom.
The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries rose one basis point, or 0.01 percentage point, to 187 basis points at 11:11 a.m. in New York, according to JPMorgan Chase & Co. (JPM)’s EMBI Global index.
The cost of protecting Brazilian bonds against default for five years rose three basis points today to 135 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 weakened 0.1 percent to 1.9922 per dollar. Yields on interest-rate futures contracts due in January 2014 fell two basis points to 7.79 percent.
OGX produced its first barrel of oil in January 2012, four years after Batista founded the explorer to take advantage of investor demand for oil-services companies. The company, Batista’s biggest holding, replaced its chief executive officer in June after cutting production targets at its first two wells by as much as 75 percent.
“The market is very disenchanted with them and with their failed promises,” Marco Aurelio de Sa, the head of fixed-income trading at Credit Agricole’s Miami brokerage, said by telephone. “Esteves is not the savior.”