OGX Petroleo & Gas Participacoes SA’s bonds are surging like never before, ignited by speculation Eike Batista’s flagship oil producer will offer to buy back the most-distressed debt in emerging markets.
The company’s $2.56 billion of debt due in 2018 has soared 7 cents this week to 22 cents on the dollar, poised for the biggest gain since the securities were issued in May 2011, according to data compiled by Bloomberg. The notes were the world’s worst-performing corporate bonds this year after tumbling from 98.1 cents in January.
While OGX has denied plans to restructure its debt, newspaper Folha de S.Paulo said July 24 that Batista is seeking partners to redeem the notes for as much as 30 cents, without saying how it got the information. Batista’s fortune has fallen 99 percent from its peak, as the failure of OGX to deliver the oil production he promised sparked concern the company will default and pushed its bonds to 15 cents last week. Abu Dhabi’s sovereign wealth fund, mentioned as one of the possible partners by Folha, is said to be interested Batista’s assets.
“Independent of the way this is negotiated or the details of the negotiation, the fact that somebody is working on a way out is interesting for people to get involved with,” Klaus Spielkamp, a fixed-income trader at Bulltick Capital Markets, said in a telephone interview from Miami. “There’s a true belief that there’s something going on.”
Press officials for Rio de Janeiro-based OGX who asked not to be identified in accordance with policy declined to comment on the performance of OGX’s bonds.
OGX’s bonds due in 2018 yield 56.22 percentage points more than similar-maturity U.S. Treasuries, more than any other performing emerging-market bond with at least $500 million outstanding, according to data compiled by Bloomberg.
The 56-year-old Batista, who ranked as the world’s eighth-richest person last year with a fortune of $34.5 billion in March 2012, has seen his net worth decline to about $200 million, according to the Bloomberg Billionaires Index.
Batista is looking for partners to help him propose an offer of between 20 cents on the dollar and 30 cents on the dollar, according to Folha. The debt would then be swapped into equity, the newspaper said.
Since 1983, senior unsecured creditors in Latin American corporate defaults have recovered an average of 35.2 cents on the dollar, according to data compiled by Moody’s Investors Service.
OGX’s $1.06 billion of notes due in 2022 now trade at 21 cents after falling to a record low 13.5 cents on July 18, according to data compiled by Bloomberg.
“For investors that bought at the low teens, 30 cents is a home-run return,” Revisson Bonfim, an analyst at Espirito Santo Investment Bank, said in a telephone interview from New York. “It makes sense.”
Mubadala Development Co., the Abu Dhabi wealth fund that restructured a $2 billion investment in Batista’s EBX Group Co., said it may be interested in his holdings.
Many of the company’s assets have significant value to a number of parties including Mubadala, according to an e-mailed response to questions yesterday from a fund spokesman, who asked not to be identified citing policy.
Mubadala agreed to take a 5.63 percent stake in EBX in March 2012, when OGX’s shares were trading at 15.83 reais. They have since fallen 96 percent to 0.56 real.
EBX agreed to redeem a “significant portion” of Mubadala’s initial investment this month and give “enhanced protection” to remaining funds. Batista’s publicly traded companies have lost about $10 billion in market value this year as OGX missed oil output targets and abandoned fields that Batista has previously declared “bonanza” assets.
OGX, which said July 1 it may shut down its only oil-producing field next year, may end the year with about $13 million in cash, according to Credit Suisse Group AG estimates.
Henri Alexaline, who helps manage $1 billion of fixed-income assets at FM Capital Partners Ltd., said the rebound in OGX bonds will be short-lived as a restructuring will be complicated by the complex structure of EBX.
“It’s more like a dead-cat bounce than the signs of a radical review of recovery prospects,” Alexaline said in an e-mail from London. “Liquidation might end up being the only feasible option.”
The extra yield investors demand to own Brazil government dollar bonds instead of Treasuries widened five basis points, or 0.05 percentage point, to 228 basis points at 12:18 p.m. in New York, according to JPMorgan Chase & Co. indexes.
Brazil’s five-year credit default swaps, contracts protecting holders of the nation’s debt against non-payment, increased eight basis points to 186 basis points.
The real fell 0.4 percent to 2.2518 per dollar.
FTI Consulting Inc. and U.S. law firms Cleary Gottlieb Steen & Hamilton LLP and Bingham McCutchen LLP said they have held meetings with OGX bondholders to discuss Brazilian insolvency law, indicating creditors are organizing before a potential restructuring, according to Espirito Santo’s Bonfim.
“It was surprising that they waited so long,” Bonfim said. “There’s a good possibility that this bondholder group has gone and said, ‘Listen, we would be interested in a restructuring with a recovery value of such.’”