Eike Batista is wagering on a single Brazilian consulting firm to oversee the court-supervised restructuring of his oil and shipbuilding companies.
The former billionaire replaced Alvarez & Marsal Inc. with Angra Partners to coordinate shipbuilder OSX Brasil SA (OSXB3)’s so-called judicial recovery process in Rio de Janeiro, OSX said in a Nov. 8 statement. The decision sees the departure of Alvarez & Marsal’s Marcelo Gomes as chief executive office.
OSX, created to provide oil platforms for Batista’s OGX Petroleo & Gas Participacoes SA (OGXP3), is following its main client into bankruptcy proceedings and will share advisory services with its sister company. The two cases represent the first real test of 2005 legislation covering bankruptcy in Brazil, said John Ashmead, a partner at law firm Seward & Kissel LLP.
“Things are complicated because the companies are related by ownership, management and inter-company transactions,” Ashmead said by telephone from New York. “It’s a great opportunity but it has also great challenges.”
OSX’s board approved the judicial recovery petition, switched advisers and will seek to change its name, address and board composition, the Rio-based company said Nov.8. Oil explorer OGX hired Angra, the Sao Paulo-based firm led by Ricardo Knoepfelmacher, on Oct. 15.
Ivo Dworschak Filho will become OSX’s third CEO in less than three months. Shareholders will vote on the measures on Nov. 28. Batista controls the company with a 67 percent stake.
OSX submited bankruptcy protection documents in a Rio state court today, Eduardo Munhoz, a partner at law firm Mattos Filho, Veiga Filho, Marrey Jr. & Quiroga Advogados that is an adviser to Batista, said in a text message. Galdino e Carneiro Advogados is representing OSX in the case, Munhoz said.
Share trading was halted in Sao Paulo today.
The proceedings mark the failure of the entrepreneur’s attempt to build an empire of interconnected energy, logistics and mining companies. Most of OSX’s oil deposits once valued by Batista at $1 trillion turned out to be duds.
“There is a domino effect here,” Adriano Pires, head of the Brazilian Center for Infrastructure in Rio de Janeiro, said by telephone. “Once the mother company fell, it was more than expected that OSX would not be able to negotiate with creditors. It was a chronicle of a death foretold.”
OSX was building three production vessels for OGX before the explorer’s production tests uncovered an absence of oil in a series of non-commercial wells. Batista either relinquished control of, or agreed to sell key assets and stakes in, the four other listed startups
OSX intends to leave out of the filing three vessels used as collateral for $1.77 billion of debt, part of the company’s leasing unit, two people with direct knowledge of the matter said last week. In a separate e-mailed statement on Nov. 8, OSX said the filing plans are limited to OSX Brasil and units OSX Construcao Naval SA and OSX Servicos Operacionais Ltda.
OSX shares lost 95 percent in the past 12 months, reducing its market value to 159 million reais ($68.9 million). The stock rose 8.5 percent to 51 centavos in Sao Paulo in Nov. 8.
OSX and OGX were the only two of Batista’s six publicly listed companies to sell bonds in international markets. OGX’s notes due 2018 fell to as low as 6 cents on the dollar last month while OSX’s $500 million of dollar bonds due 2015, backed by a contract to lease a platform to OGX, have lost 20 cents this year to 84 cents.
OSX’s shipyard unit extended the maturity for a year on a 461 million-real loan from state-run Caixa Economica Federal, which is guaranteed by Banco Santander SA, according to a regulatory filing this week. Caixa also granted a loan of 627.4 million reais to the unit, according to its earnings statement.
Since Aug. 18 state development bank BNDES has been pushing out maturities on a loan for 518 million reais with guarantees from Banco Votorantim SA and no vessel as collateral, two people with knowledge said last month.
Discord between OSX and its main client became public before OGX’s bankruptcy filing. OSX said Oct. 29 it was removing one of its production vessels from OGX’s Tubarao Azul field on non-payment and would seek a new client for the unit.
OGX listed OSX as its top creditor among suppliers when it filed for the protection, according a copy of the list of creditors obtained by Bloomberg News. The oil producer has liabilities of 2.45 billion reais with OSX, or 22 percent of the total 11.4-billion reais debt declared in court, it said, adding that some of the debt is “disputable.”
OSX probably will assert claims for damages upon termination or breach of agreements for $2.6 billion, OGX said in a September presentation made by advisers Blackstone Group LP to note holders released as part of the negotiations. The shipbuilder suspended contracts with OGX for the leasing and operation of the OSX-2 vessel and WHP-2 platform, OSX said in a regulatory filing today.
“There is some tension between OGX and OSX,” Octavio Fragata de Barros, a litigation and arbitration specialist at law firm TozziniFreire Advogados, said by telephone from Rio. “Although they are in the same group, each company has its own board and directors. They need to protect themselves to not be accused of breaching any fiduciary duties, and they need to protect the assets of their companies.”
With OSX, Batista sought to profit from Brazil’s local content rules, which limit the use of imported equipment and services by the oil and gas industry. The company held its initial public offering in March 2010 after reducing the size of the sale to lure investors. Two months later, OSX formed a partnership with Hyundai Heavy Industries Co. to provide technology for the shipyard, where construction began in July 2011 at the Batista-founded Acu port in Rio state.
OSX shares never recovered their IPO levels even as the tycoon promised to create “the Embraer of the seas,” referring to the world’s largest regional-jet maker.
Until September 2012, the company was saying it had firm orders for vessels worth $7 billion. Since then, OSX has been shrinking projects, firing staff and putting units on sale after contracts were canceled and losses mounted.
In March 2012, the company sold $500 million in dollar debt to help finance construction of OSX-3, one of three platforms commissioned by OGX. The production platform was used to guarantee the bonds. A year later, when output at OGX’s first field, Tubarao Azul, had already failed to meet company expectations, OSX shelved plans to sell a second international debt security amid a rout in its securities, according to a memo from underwriters obtained by Bloomberg News at the time.
In July, OGX abandoned discoveries it previously declared commercial and OSX no longer had a source of revenue for two of its three floating production storage and offloading vessels, or FPSOs.
Built in Singapore, the bond-financed ship arrived in Brazil in July and is preparing to start production at OGX’s Tubarao Martelo field once it receives an environmental license.
The OSX-1 platform was used by OGX at the Tubarao Azul field, until OSX canceled the charter on Oct. 30 because of a lack of payments. The OSX-2 platform is docked in Malaysia while the company seeks buyers.
Holders of the OSX bonds hired AlixPartners LLP to advise on a possible restructuring, two people with knowledge of the matter told Bloomberg News earlier this month.
AlixPartners, the New York-based firm that advised General Motors Co. on its restructuring when the automotive giant filed for bankruptcy protection in 2009, will work alongside the creditors’ legal adviser Bingham McCutchen LLP, said the people.
The fact that OGX and OSX have the same controlling shareholder doesn’t mean the court would consider both cases as part of the same dispute, said Juliana Bumachar, corporate recovery specialist and partner at law firm Bumachar Advogados Associados.
“This is another company and a different case,” Bumachar said by telephone from Rio.
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