OGX’s Sub-50 Cent Bonds Signal Death of Billionaire Put

Brazilian billionaire Eike Batista’s increasingly frenetic search for cash is unnerving bond investors.

OGX’s $2.56 billion of notes due in 2018 fell 8.69 cents on the dollar to a record 48.11 cents yesterday, a day after he said in a filing he had sold 70.5 million shares between May 24 and May 29 for 121.8 million reais ($56.7 million) at an average price that’s more than 90 percent below its all-time high. The bonds have lost 41.9 percent this year, the worst-performing emerging-market securities with at least $500 million outstanding, as yields surged to 28.75 percent, according to Bloomberg index data.

The stock sale, coming weeks after he put his private jet up for sale, signals the death of a put option that would oblige Batista to purchase as much as $1 billion of OGX shares if the company needed additional capital and couldn’t find more favorable financing options. The sale, equal to less than 3 percent of Batista’s controlling stake, comes as more than $28 billion of his personal wealth has evaporated since last year after shares fell 87 percent and his oil producer struggles to meet output goals.

“In terms of timing and sending a signal to the market, being the main owner and selling now at such a distressed level and in order to monetize such a paltry amount, it is anything but a show of confidence,” Henri Alexaline, who helps manage $1 billion of fixed income at FM Capital Partners Ltd. in London, said by e-mail. “It certainly puts into question Eike’s own finances and his ability to respect the $1 billion put he is facing next year to finance capital expenditures.”

‘Quality Assets’

OGX’s press office declined to comment on the performance of the company’s bonds.

Under terms of the option, which expires May 2014, Batista would pay 6.3 reais per share, as much as four times the price he sold at last month. OGX shares sank 8.5 percent to 1.18 reais yesterday.

“This option underpins my confidence in OGX’s technical expertise and quality assets, as well as the new opportunities that the oil and gas sector offer to OGX,” Batista said in a statement on Oct. 24.

The divestment follows injections of at least 2 billion reais of his own cash into the company since the initial public offering in June 2008. Batista is raising cash as local lenders demand more collateral for loans. Last month, he raised 1.4 billion reais by selling a stake in power-generation venture MPX Energia SA to Germany’s E.ON SE. OGX also sold an $850 million stake in a field to Malaysia’s Petroliam Nasional Bhd.

Cash Plunges

The put “is essential to capitalize OGX,” Banco Santander SA analysts Christian Audi and Vicente Falanga Neto said in a note to clients today.

Batista is worth $6.3 billion, down from a peak of $34.5 billion in March last year, according to the Bloomberg Billionaires Index. His stake in OGX is worth $1 billion after the sale.

“It seems obvious that Mr. Batista is stretching for cash,” Cornel Bruhin, a money manager responsible for $4.5 billion of emerging-markets debt at MainFirst Schweiz AG, said in an e-mail. “If I were bondholder, I would start worrying even more after this news.”

OGX’s cash holdings fell 43 percent last year, according to data compiled by Bloomberg. Its $1.1 billion of cash and equivalents at the end of the first quarter and funds from the Petronas sale are set to run out by mid-2014. Trailing 12-month free cash flow fell to negative $1.77 billion last year, the data show.

Recovery Value

Standard & Poor’s assigned OGX a rating of B-, six levels below investment grade, on April 3 after the company missed output goals and crude production fell 86 percent in four months. Moody’s Investors Service downgraded the company’s rating six days later to B2, or five levels below investment grade, citing the company’s low production.

Fitch Ratings, which cut OGX’s rating to B- on May 17, estimates bondholders may recover between 31 cents on the dollar and 50 cents on the dollar in a restructuring.

“There’s nothing there to support the bond,” said Vinicius Pasquarelli, an emerging-market debt trader at Standard Credit Group LLC. “You’re selling something that doesn’t have anything to back it up. You bought a business plan, and it’s going down.”

Jack Deino, a money manager who oversees about $1.8 billion in emerging-market debt at Invesco Ltd., says Batista still has a chance to turn things around if OGX’s oil production rebounds.

‘Good Luck’

“Don’t count OGX out and don’t count Eike Batista out,” Deino said in an interview in New York. “Exploration and production is unpredictable and it’s risky, and just as he’s had some bad luck on his first few production wells, he could have some good luck going forward.”

The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries fell 13 basis points to 229 basis points at 12:56 p.m. in New York, according to JPMorgan Chase & Co.’s EMBI Global index.

The cost of protecting Brazilian bonds against default for five years fell five basis points to 172 basis points, according to prices compiled by Bloomberg. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements.

‘Broke’ Batista

The real weakened 0.8 percent to 2.1493 per dollar.

Batista’s fortune is also plunging as the value of his other companies, including oil service provider OSX Brazil SA, miner MMX Mineracao & Metalicos SA and logistics company LLX Logistica SA, tumble.

“A ‘broke Batista’ makes the put option impossible to exercise,” Rafael Elias, a director of emerging-markets trading at Credit Agricole SA in New York, wrote in a note to clients. In that situation “the cash strain increases substantially and the default risk skyrockets.”

Before it's here, it's on the Bloomberg Terminal.