The bond-market collapse of OGX Petroleo & Gas Participacoes SA has been so severe investors are offering to sell their claims for 19 cents on the dollar. The true value may be as little as zero, according to Barclays Plc.
OGX’s $1.06 billion of debt due 2022 plunged 10.5 cents this week to the lowest price among more than 1,900 dollar-denominated emerging-market corporate bonds after billionaire Eike Batista’s flagship company said on July 1 that it’s considering halting output at its only oil-producing field. The bonds have tumbled 75 cents from this year’s high in January, while OGX’s $2.56 billion of notes due in 2018 lost 77 cents to 20.9 cents, according to data compiled by Bloomberg.
Investors run the risk of losing all of their money in part because OGX’s obligations may balloon in the event of a default as it incurs liabilities from sister company OSX Brasil SA (OSXB3), according to Christopher Buck, an analyst at Barclays. The possibility that OGX will repay other creditors first and the prospect that its oil reserves could be worth less than estimated may also erode the payout for bondholders, according to Stone Harbor Investment Partners and Oppenheimer & Co.
“We’d prefer to sit this one out,” William Perry, an emerging market fund manager at Stone Harbor, which oversees $68 billion in assets, said in a telephone interview. The New York-based firm was named the 2013 manager of the year for emerging-market debt by Institutional Investor magazine. “This isn’t a clear cut case where you can see value and assign a level. There are a lot of creditor constituencies involved here, probably a lot of off balance sheet liabilities.”
Press officials at OGX and parent company EBX Group Co. declined to comment on the performance of OGX bonds or potential recovery values for creditors in the event of a default.
“Different scenarios of an OGX default produce a wide range of recovery values -- in our case, from 0 to 37 cents on the dollar,” Barclays’s Buck wrote in a July 1 note to clients. “The wide dispersion is mainly due to the possible reduction in ownership of Tubarao Martelo and Atlanta, as well as the potential for significant OSX liabilities to be added to the claims pool.”
OGX said in a regulatory filing July 1 that it may stop output at its Tubarao Azul field in 2014 and that it canceled orders with OSX for new oil and wellhead platforms. OGX said it will immediately pay $449 million in compensation to OSX, or 39 percent of the oil’s producer’s cash hoard at the end of the first quarter.
Barclays estimates that OGX may finish the quarter with about $150 million in cash, while Credit Suisse Group AG said in a report yesterday the oil producer may be left with about $13 million by year-end, assuming it doesn’t receive part of an $850 million payment by Petroliam Nasional Bhd., known as Petronas, for the sale of a 40 percent stake in the Tubarao Martelo field, where development continues.
OGX is also considering asking Brazil’s oil regulator to suspend the license to develop the Tubarao Tigre, Tubarao Gato and Tubarao Areia offshore fields, according to the filing. The company has until September to present its plan to develop the fields or it will have to return them, newspaper O Estado de S. Paulo reported yesterday.
“If there is a default, then they could lose their license,” Omar Zeolla, a corporate credit analyst at Oppenheimer, said in a telephone interview from New York. “Those could go back to the government. It’s hard to estimate the recoverable amount of oil from the assets that they currently own after the experience in Tubarao Azul. If it goes through liquidation, there could be no value for bondholders.”
Batista, whose resources and logistics startups made him the world’s eighth-richest person in March 2012, is scaling back projects and selling assets after net debt at his EBX holding company almost doubled the combined market value of its units. OGX shares have slumped 90 percent this year after missed targets and production delays, while Batista’s estimated fortune has shrunk by about $30 billion from its peak.
Ana Paula Ares, an analyst at Fitch Ratings, estimates investors may recover between 31 cents and 50 cents on the dollar in an OGX restructuring.
‘Potential for Recovery’
“When you see the amount they’ll get paid by Petronas, that could give you an assessment that the assets the company has, despite the fact they’re not producing, they do have some value,” she said by telephone from Buenos Aires. “That’s another way bondholders could recover the value if there was any default. There’s potential for recovery through the assets.”
The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries climbed two basis points to 243 basis points today as of 9:12 a.m. in New York, according to JPMorgan Chase & Co.’s EMBI Global index.
The cost of protecting Brazilian bonds against default for five years rose to 200 basis points, according to prices compiled by Bloomberg. 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 0.5 percent to 2.2649 per dollar.
Standard & Poor’s cut OGX’s credit rating to CCC yesterday, eight steps below investment grade, and maintained its negative outlook, citing the impact of the company’s lower production development plan on future operating performance.
“It’s difficult to make an assumption of what value the assets have, as management didn’t really provide full clarity on the problems, and we don’t know what the real potential for the proven reserves is,” Cornel Bruhin, a money manager responsible for $4.5 billion of emerging-market debt at MainFirst Schweiz AG, said in a telephone interview from Zurich. “There is value attached, there should be a possibility, but more and more investors don’t see it. Otherwise they wouldn’t try to sell down here.”