BlackRock Dodges Pimco Losses in Abandoning OGX: Brazil Credit

BlackRock Inc.’s sale of about 70 percent of its holdings in bonds from billionaire Eike Batista’s oil producer is helping the largest asset manager avoid the losses suffered by Pacific Investment Management Co.

While Pimco, the manager of the world’s biggest bond fund, kept buying in the six months through March as the selloff intensified in bonds issued by OGX Petroleo & Gas Participacoes SA, BlackRock’s most recent regulatory filings show it cut its holdings to $69 million. Prices on OGX’s $2.56 billion of 2018 bonds have sunk to a record low 16 cents on the dollar from 77.6 cents at the end of March and 89.7 cents in September, making them the worst-performing dollar debt in emerging markets.

The rout, sparked by Batista’s failure to deliver the oil production he pledged from offshore fields he has called “bonanza” assets, is vindicating BlackRock’s decision as investors brace for what would be the biggest-ever corporate default in Latin America. Credit Suisse Group AG estimates Rio de Janeiro-based OGX, which forms part of a Batista empire whose combined market capitalization has fallen $38 billion in the past two years, will have about $13 million in cash by year-end.

“Without revenue, the shareholders don’t have much to lean on, and I’m not sure at the end of the day the bondholders do either,” Arthur Byrnes, who oversees about $1 billion of assets as senior managing director at Deltec Asset Management LLC, said in a telephone interview from New York. Deltec has sold all its OGX notes, he said. “The ability to buy the bonds at a discount -- it’s not clear that it’s good value. The big lesson here is you can’t buy overpromises.”

Output Setbacks

Regulatory filings from February to April show BlackRock funds sold about $160 million in face value of OGX dollar debt in the preceding six months.

Pimco increased holdings of OGX’s 2018 and 2022 securities by about $170 million in the six months through March to about $576 million, filings from the world’s biggest active bond-fund manager show.

OGX, which said earlier this month it’s considering halting production at its only active field due to lower than expected output, is part of the empire created by Batista, whose estimated fortune has shrunk by about $31 billion from its peak, according to data compiled by Bloomberg.

Beating Peers

Michael Reid, a spokesman for Newport Beach, California-based Pimco, declined to comment on the fund manager’s holdings of OGX debt and how its investments in the company’s debt have changed since March.

Melissa Garville, a spokeswoman at BlackRock, declined to comment on the company’s holdings of OGX bonds and how its investments have changed since the most recent filings.

BlackRock’s $10.5 billion High Yield Portfolio, which has outperformed 91 percent of peers over the past five years, sold all $114 million of its OGX debt between June 2012 and March 2013, when the bonds traded at an average 88.2 cents on the dollar, according to regulatory filings. The company’s 8.5 percent notes due in 2018 were the fund’s third-largest individual holding at the end of June 2012.

BlackRock Chief Executive Officer Laurence D. Fink said in a conference call with analysts and investors in January that the company, which oversees $3.94 trillion in assets, will put a greater emphasis on emerging markets in 2013.

BlackRock Hires

The asset manager said in April it hired Gerardo Rodriguez, a former undersecretary of finance and public credit in Mexico, to help support its emerging-markets business and product-development strategy. Sergio Trigo Paz, the head of emerging-markets fixed income within the portfolio-management group, joined the money manager last year.

An OGX press official who asked not to be named in accordance with policy declined to comment. The company said in a July 10 e-mail response to questions that it isn’t restructuring its dollar debt.

U.S. law firms including Cleary Gottlieb Steen & Hamilton LLP and Bingham McCutchen LLP said they have met with Batista’s creditors in the past week to discuss Brazilian insolvency law.

Moody’s Investors Service cut OGX’s credit rating two levels to Ca yesterday, 10 steps below investment grade, and maintained its negative outlook. Obligations rated Ca are likely in, or very near, default, according to the rating company.

Record Default

A bond default by OGX would be almost double the size of the largest ever in Latin America, according to data compiled by Moody’s. Banco de Galicia y Buenos Aires SA defaulted on $1.9 billion of debt in 2002 after the Argentine government halted its own bond payments.

“A restructuring seems imminent,” Jack Deino, who oversees about $1.8 billion in emerging-market debt at Invesco Ltd., said in a telephone interview from Atlanta. “The bottom line is you just have way too much debt and way too few assets. This is going to be a great test of the Brazilian bankruptcy regime and the legal backdrop in the country.”

Batista is seeking to sell assets and renegotiate debt amassed by his six publicly traded companies. He’s also looking to bring in partners and inject fresh capital into OGX, a person with direct knowledge of the plans said earlier this month. Grupo BTG Pactual, the investment bank adviser for Batista’s companies, is looking for prospective oil field partners, according to the person, who asked not to be identified because the negotiations are private.

‘Silver Lining’

Henri Alexaline, who helps manage $1 billion of fixed-income assets at FM Capital Partners Ltd., said that OGX could avoid default if a foreign investor provides a cash infusion and helps develop the company’s oil fields.

“The only silver lining could come from foreign investors,” Alexaline said in an e-mailed response to questions. “If you have an anchor investor ready to position himself in the company and take on responsibility for the ongoing development plan, that would be clearly a positive and that could allow OGX to avoid running out of cash and get into default.”

OGX shares have tumbled 88 percent this year, the worst performance on Brazil’s benchmark Ibovespa index.

Brazilian government dollar bond yields have surged an average 1.51 percentage points to 4.97 percent in the period, JPMorgan Chase & Co. index data show.

The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries fell five basis points, or 0.05 percentage point, to 225 basis points at 3:11 p.m. in New York, according to JPMorgan.

Interest Payments

The cost of protecting Brazilian bonds against default for five years dropped two basis points to 175 basis points. 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.

OGX may finish the quarter with about $150 million in cash, according to a July 1 report from Barclays Plc. The company is scheduled to make a $45 million interest payment on its 2022 dollar bonds Oct. 1 and a $109 million payment on the 2018 bonds in December.

BlackRock owns about $68.7 million of the 2018 securities while holding less than $1 million of the 2022 notes, filings show. Pimco holds about $320.3 million of the 2018 debt and $255.4 million of those due in 2022.

“There’s a high risk that the company could be liquidated,” Omar Zeolla, a corporate credit analyst at Oppenheimer & Co., said in a telephone interview from New York. “A debt restructuring would save them $300 million a year in interest. They need more money to operate and exploit their assets.”

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