Bondholders of former billionaire Eike Batista’s oil producer should pump more money into the Rio de Janeiro-based company to maximize the equity they’ll receive as part of a swap offer, according to Barclays Plc.
While investors shouldn’t buy more bonds at current prices, the threshold for a so-called debtor-in-possession financing conversion implies an enterprise value of just $360 million, Christopher Buck, a debt analyst at Barclays, said in a report to clients after Oleo & Gas Participacoes SA announced a debt-to-equity swap proposal on Dec. 24. The stock last traded at 26 centavos for a market value of $358 million.
“This is a conservative valuation and therefore participating in DIP financing improves the upside potential for bondholders,” Buck said in the report. “We estimate that non ad hoc group holders will have to pay 1.62 cents per bond to participate in the DIP financing and recommend they do so.”
Oleo & Gas, which intends to emerge from bankruptcy protection by March, last month reached an agreement with creditors, including holders of most of its $3.6 billion in bonds, to swap debt into a 90 percent equity stake. The accord includes an injection of at least $200 million to keep its sole producing oil field operating. Creditors that inject new cash stand to get proportionally more stock.
Pacific Investment Management Co. and BlackRock Inc. led negotiations for a so-called ad hoc committee members group of bondholders who have exclusive rights to provide the first tranche of debtor-in-possession financing of about $118 million. Other holders can participate in the second tranche of the financing to receive more shares in the exchange.
Under the agreement, bondholders will obtain 16.3 percent of Oleo & Gas shares in exchange for $3.769 billion face value in bonds. Oleo & Gas was formerly known as OGX.
Barclays estimates that committee members that participate in the negotiation agreement represent 55 percent of bondholders and will get a 9 percent stake in the company swapping their bonds, while the others will obtain 7.3 percent for their bonds.
Bondholders will obtain a 65 percent stake if they participate in the new financing component of the deal. Barclays calculates that the committee members will do 87.3 percent of the new financing, injecting $182 million and receiving for that 55.7 percent of the company. The other bondholders will inject $26.5 million and get 12.7 percent, according to Barclays estimates.
In total, Barclays sees the main bondholders obtaining 66.7 percent of the company while the remaining bondholders will own 14.6 percent. “We also calculate that OSX will own 6.5 percent and suppliers 2.2 percent,” the report said.
While Barclays recommends existing holders participate in the DIP financing, “we still do not find this compelling enough to recommend adding bonds at current levels” given uncertainties surrounding asset values, cash flow and the bankruptcy process, Buck wrote.
The deadline for completing the debtor-in-possession financing documents is Jan. 24.
“Many of our emerging markets investors that are holders of OGX bonds have expressed dismay and frustration with the process and the outcome of the announced agreement,” said Michael J. Roche, an analyst at Seaport Group LLC. “The investors said the agreement had a closed-door nature and ended up presenting a disproportionality between the new capital providers and the other bondholders that will not provide more capital.”
The exchange is the best option for holders to recover some value from notes that lost 90 percent last year, said Russel Dallen, the head trader at Caracas Capital Markets. If the company succeeds at expanding output, bondholders could recover as much as 60 cents on the dollar, Dallen said.
“They’re not doing it because of love of Eike, they’re doing it because it’s the best way to get out of the situation,” Dallen said by telephone from Miami. “You’re betting with some pretty smart people that this is going to have an outcome better than seven cents on the dollar.”
The proposal is aimed at giving incentives to investors to inject new money because otherwise the company won’t be able to recover, said Eduardo Munhoz, a lawyer for the company in charge of the bankruptcy protection case.