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Lupatech Bonds, Shares Drop on Plan to Change Debt Covenants

Lupatech SA’s bonds and shares tumbled after Brazil’s largest oil-services and equipment provider asked holders of $275 million of debt to amend some restrictive covenants as it prepares to sell assets.

Lupatech is seeking consent to remove a guarantee on $275 million of 9.875 percent senior unsecured perpetual bonds, which are backed by the company’s Steelinject Injecao de Acos unit, according to a statement today. The price of the bonds sank 10.1 cents to 38 cents on the dollar at 11:20 a.m. in New York. Yields on the notes surged 544 basis points to 25.98 percent, according to Trace, the bond price reporting system of the Financial Regulatory Authority.

The Caxias do Sul, Brazil-based company said Oct. 13 it may sell Steelinject to Forjas Taurus SA for 14 million reais ($7.5 million). Lupatech, whose cash flow was enough to cover only about a third of its interest expenses in the past year, is selling assets after its biggest client, Petroleo Brasileiro SA, delayed orders in the past three years.

The likelihood of a default in the next 12 months is “very high,” Paula Martins, a Standard & Poor’s analyst, said in a telephone interview from Sao Paulo. “The liquidity is really a concern because they have very high refinancing risk. This company has acquired a lot of other companies in the past through debt, and they’ve had difficulty incorporating these companies into their business, leading to very high fixed costs and low margins.”

The debt is rated Caa3 by Moody’s Investors Service, nine steps below investment grade, and one step higher at CCC by S&P.


Lupatech’s external press office in Sao Paulo said it couldn’t immediately comment on the solicitation.

Its shares dropped 11 percent to 5.13 reais in Sao Paulo, poised to fall to the lowest level since May 2006.

“A company like this, that’s been given such a good hand - - oil services in Brazil as a Brazilian company -- I don’t understand how they messed that up,” said Bevan Rosenbloom, a credit strategist at Citigroup Inc. in New York. The move to sell assets “is a step in the right direction,” he said.

The company’s long-term debt equaled 54 percent of its capital in the third quarter, higher than about 89 percent of its global peers in the oil-equipment and services industry, according to data compiled by Bloomberg. Earnings before interest, taxes, depreciation and amortization, a measure of cash flow known as Ebitda, equaled 36 percent of its interest expenses in the year through the third quarter.

‘Not Sustainable’

Lupatech SA’s capital structure and liquidity are “not sustainable,” Filippe Goosens, an analyst with Moody’s Investors Service in Sao Paulo, said in a telephone interview. “The likelihood of a restructuring is significant.”

Lupatech said the consent solicitation started today and will expire at 5 p.m. New York time on Dec. 13. Bondholders who grant consent will receive a cash payment of $2.50 for each $2,000 of principal.

Steelinject represents less than 1 percent of the company’s 1.5 billion reais worth of total assets, Lupatech said in a statement today.

“Permission to sell Steelinject will allow the sale of this asset to conclude without hurting the guarantees to perpetual bondholders,” the company said. “Additionally, it will help strengthen the company’s cash flow.”

While Lupatech’s asset sales may generate 150 million reais to 200 million reais, that’s “not enough for the company’s solvency,” Auro Rozenbaum, an analyst at Banco Bradesco SA, wrote in a note to clients today.

The company may also be considering selling shares, Rozenbaum said.

“We expect it to come out with a capital contribution solution or capital restructuring soon,” he said. “In our understanding, a capitalization is about to be announced, and we expect no less than 200 million reais to 250 million reais.”

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