OGX Petroleo & Gas Participacoes SA (OGXP3) failed to reach an agreement with holders of dollar-denominated bonds as former billionaire Eike Batista’s oil company heads toward Latin America’s biggest corporate debt default.
Discussions between OGX, which is running out of money to test its most promising field, and holders of bonds due in 2018 and 2022 concluded without any restructuring agreement, the Rio de Janeiro-based company said in a statement released today. Shares fell as much as 24 percent in Sao Paulo.
The breakdown opens the way for a bankruptcy protection filing that would put $3.6 billion of dollar bonds into default, the region’s largest on record, and culminate a 16-month decline that wiped out more than $30 billion of Batista’s personal fortune after offshore deposits he had valued at $1 trillion turned out to be duds.
“He tried to do too much too fast and he tried to do that with borrowed money,” Arthur Byrnes, who oversees about $1 billion as senior managing director at Deltec Asset Management LLC and sold all OGX notes before June, said by phone from New York. “He has failed and the whole thing is a shame because any country needs aggressive and successful entrepreneurs.”
Batista became Brazil’s richest man after raising billions of dollars in equity markets and loans from a state bank to fund OGX’s drilling program and sister commodities startups. He then tapped debt markets, selling bonds to investors including BlackRock Inc. (BLK) and Pacific Investment Management Co.
OGX continues to review debt restructuring options, it said in today’s statement. The company, which expects to run out of cash in the last week of December, needs about $250 million to sustain operations through April, it said in an Oct. 23 presentation to Rothschild, the adviser hired by bondholders.
“New capital from either debt or equity financing is required to bridge near-term liquidity in the first quarter of 2014,” OGX said in the presentation posted today on its website. “OGX is evaluating a number of farm-out opportunities to fully fund the mid- to long-term business plan.”
The company’s cash fell to about $82 million at the end of September, it said in a separate document dated Oct. 7 and posted on its website today. OGX has an enterprise value of $2.72 billion in a “base case operating model”, the company said. That’s more than seven times OGX’s market value of 776.6 million reais ($357 million).
The company has been building arrears with suppliers. Diamond Offshore Drilling Inc., a rig supplier to OGX, said Oct. 24 it wrote off $58 million from second and third quarter earnings on missed payments. Ensco Plc, another supplier, said on the same day that OGX’s “deteriorating” financial situation curbed its third-quarter profit.
“Payments are only made to critical vendors who currently perform services at the Martelo field to get first oil production up and running,” OGX said in the Oct. 7 document, titled “Project Olympic.”
The suppliers claims amount to $546 million, OGX said in a September presentation also posted on its website today.
The oil company missed a $45 million payment on Oct. 1, prompting Standard & Poor’s to assign a default rating to $1 billion of bonds. Moody’s Investors Service and Fitch Ratings are giving OGX the 30-day grace period before calling a default. The grace period expires Oct. 31.
Earlier this month, two people with direct knowledge said OGX was considering filing for bankruptcy protection late October or early November. Once a judge accepts a filing, the company would have 60 days to present a restructuring plan.
An official at OGX’s press office in Rio, who isn’t an authorized spokesperson, declined to give additional comments when reached by phone today. Melissa Garville, a spokeswoman at BlackRock in New York, declined to comment. Pimco spokesman Michael Reid didn’t reply an e-mail request seeking comment.
OGX risks having the country’s oil regulator revoke its 30 oil and natural gas licenses in Brazil if it files for bankruptcy, according to Sao Paulo-based TozziniFreire Advogados, a law firm that has clients in the oil industry.
The head of Brazil’s oil regulator, Magda Chambriard, said Oct. 17 the regulator hadn’t decided if OGX would keep its fields if it goes into bankruptcy protection.
Shares of OGX, which Batista founded in 2007, lost 95 percent in the past 12 months, the worst-performing stock among 73 members of the Brazilian benchmark Ibovespa Index, after a series of missed output targets. The stock dropped 21 percent to 23 centavos in Sao Paulo today.
Batista asked bondholders to convert debt into equity, diluting his role in the company, two people with direct knowledge of the matter said Sept. 9. OGX’s $2.56 billion in bonds due in 2018 trade at 8 cents on the dollar.
Batista is running out of alternatives for OGX, Deltec’s Byrnes said.
“He is like a caged animal now,” he said. “I feel sorry for him, but if you want to be a big shot, you have to deliver.”
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