CarVal Investors LLC, the hedge-fund manager with $8 billion in assets, is buying bonds sold by Brazilian oil producer OGX Petroleo & Gas Participacoes SA (OGXP3) after they posted the worst selloff in emerging markets.
Notes due in five years from OGX, controlled by billionaire Eike Batista, have plunged 82 cents from their January high to 16 cents on the dollar, the biggest drop among all developing-nation securities in Bank of America Corp.’s Global Corporate and High Yield Index. Their price is the lowest of any performing corporate bond in the world. Credit Suisse Group AG estimates OGX, which has $3.6 billion of dollar debt due in 2018 and 2022, may have about $13 million left in cash by year-end.
While investors including BlackRock Inc., the world’s biggest money manager, have dumped OGX’s debt as Batista fails to deliver production pledged from offshore fields, Joseph Graf, a senior managing director at CarVal, said the securities are undervalued. Greylock Capital Management LLC, the New York-based hedge fund that helped negotiate Greece’s debt swap last year, said OGX’s bonds are attractive at current prices.
“Down at these levels, this is a very interesting situation because of the complexity, the different legal regimes, the sector involved,” Graf, who declined to provide details on CarVal’s OGX holdings, said in a phone interview from New York. “Creditors, financial advisors and legal advisers need a strategy that’s going to fundamentally improve the probability of recovery and not just force a breakpoint here that ends in liquidation.”
CarVal is seeking to replicate the success it had investing in distressed debt from Brazilian meatpacker Independencia SA to Mexican glassmaker Vitro SAB, which Graf said helped the Minneapolis-based fund’s emerging-market strategies net average annual returns of 15.2 percent since 1999.
Distressed-debt investors such as CarVal now represent the majority of buyers of OGX bonds at these depressed levels, according to Sam Aguirre, a senior managing director at advisory firm FTI Consulting Inc.’s corporate finance and restructuring practice. FTI, along with U.S. law firms including Cleary Gottlieb Steen & Hamilton LLP and Bingham McCutchen LLP, have held meetings with OGX bondholders this month to discuss Brazilian insolvency law.
Regulatory filings from February to April show New York-based BlackRock sold about $160 million in face value of OGX dollar debt in the preceding six months, cutting holdings by about 70 percent to $69 million.
Melissa Garville, a spokeswoman at BlackRock, declined to comment on the fund manager’s OGX holdings.
The oil producer’s $2.56 billion of 8.5 percent 2018 notes are the third-most traded emerging-market securities over the past 20 days by volume, with $546 million in face value transacted, according to data from Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
“It is a risky buy, but a buy nonetheless,” Diego Ferro, co-chief investment officer at Greylock, which oversees $500 million in emerging-market debt, said in an e-mailed response to questions. “Even in bankruptcy the recovery value looks higher than current trading prices. This is a very complicated situation, and the prices seem to reflect a worst-case type scenario.”
He declined to say whether Greylock owns OGX bonds.
OGX said in a July 10 e-mail response to questions that it isn’t restructuring its dollar debt. An OGX press official declined to comment when reached July 19.
Batista wrote last week in an opinion piece in Brazil’s Valor Economico newspaper that he would honor all of his obligations, while shifting the blame for OGX’s failure to meet production targets to auditing firm DeGolyer & MacNaughton Corp., which he said helped build up shareholder expectations.
“I was as surprised as every one of my investors, partners and the market,” Batista wrote in the article about the reversal for OGX’s outlook. “Maybe I put too much trust in people who didn’t deserve that confidence, but in the end the responsibility is all mine.”
Batista, whose net worth has plunged $31 billion since its peak last year, had forecast OGX would pump 730,000 barrels of oil equivalent a day by the end of 2015. The company extracted 23,000 per day last month, including just 9,700 a day from the Tubarao Azul field, its only producing offshore field.
OGX may shut Tubarao Azul next year after completing a review of the field and plans to start output at offshore field Tubarao Martelo later this year, where Malaysia’s Petroliam Nasional Bhd. agreed to buy a 40 percent stake in May for $850 million.
Robert Abad, a money manager who helps oversee $51 billion in emerging-market assets at Western Asset Management Co., said he’s shunning OGX’s bonds because it’s difficult to determine the value of the company’s assets.
“What you need to see is an asset base that’s there, that has some value,” Abad said in a telephone interview from Pasadena, California. “It’s not clear what the asset base looks like. It’s not clear what values you should assign to the asset base in general. This is about liquidity being applied toward making some asset produce, and where we are right now, the assets haven’t proven their worth.”
The extra yield investors demand to own Brazil government dollar bonds instead of Treasuries fell one basis point, or 0.01 percentage point, to 212 basis points at 8:29 a.m. in New York, according to JPMorgan Chase & Co.’s EMBI Global index.
Brazil’s five-year credit default swaps, contracts insuring the nation’s debt against non-payment, dropped one basis point to 165 basis points.
Moody’s Investors Service cut OGX’s credit rating two levels to Ca last week, 10 steps below investment grade, and maintained its negative outlook on the company. Obligations rated Ca are likely in, or very near, default, according to the rating company.
“It seems that with only very marginal positive news this could rally from current levels,” Greylock’s Ferro said. “It is unusual to see a bond trading at 15 cents. Bondholders are fairly aligned with Batista. He either turns the situation around or may end up broke.”