OSX Bond’s Ship Claim Outdone by BNDES 120% Cover: Brazil Credit

BNDES’s loan guarantees to Eike Batista’s OSX Brasil SA are proving how the state development bank is better protected than secured bondholders against the billionaire’s crumbling empire.

When BNDES lent the shipbuilder 1.4 billion reais ($632 million) in June 2012 to build a shipyard, the bank extracted pledges including letters of guarantee worth 120 percent of the 21-year loan for the first three years, according to documents provided to Bloomberg last week by Congressman Cesar Colnago, who said he obtained them through a request under Brazil’s Constitution and legislative rules. The loan is also secured by rights to real estate, construction equipment and machinery, and OSX shares in the project.

While Standard & Poor’s says the collateral will more than cover the BNDES loan, OSX’s $500 million of secured 2015 notes have plunged more than any emerging-market corporate bond due within three years on speculation the oil platform backing the securities won’t be worth enough to help bondholders recoup their money. Batista’s personal fortune has plunged 90 percent from its peak on concern his flagship oil company will default, threatening the viability of its sister company OSX.

“The bank’s asset quality is high and non-performing loans are extremely low because they ask for more guarantees,” Sergio Garibian, an analyst at S&P, said in a telephone interview from Buenos Aires. “And those guarantees come from other banks. BNDES is conservative, and we can see that conservatism through those guarantees and the way they operate.”

Yields Soar

BNDES’s press office said the bank is in a “comfortable” position with Batista’s EBX Group Co. holding after structuring guarantees to mitigate credit risk, as it does in all transactions.

“Each one of the contracts signed with EBX has a structure of specific guarantees, including bank-backed letters of guarantee,” the bank said in an e-mailed response to questions. “With that, BNDES’s direct exposure to the EBX group is a very small fraction of the bank’s net assets.”

OSX’s bonds have no construction risk because the platform is already built, the company’s press office said in an e-mailed response to questions. The platform set sail from Singapore on July 15 and should arrive in Brazil in the third quarter, it said.

Yields on OSX’s bonds due in 2015 have soared almost 1,600 basis points, or 16 percentage points, this year to a record 23 percent last week. The notes have lost 19 cents in that span to 85 cents on the dollar, the most among emerging-market corporate debt maturing within three years and with at least $500 million outstanding, according to data compiled by Bloomberg.

‘A Lot’

No other fixed-rate secured bonds in the world with at least $500 million outstanding due within three years trades at less than 99 cents on the dollar, the data show.

The platform and a $449 million payment to Rio de Janeiro-based OSX from OGX Petroleo & Gas Participacoes SA, Batista’s oil producer, for canceling a vessel lease are helping ensure cashflows to bondholders, said Revisson Bonfim, an analyst at Espirito Santo Investment Bank. If OGX has to back out of its lease, and if other companies including Petroliam Nasional Bhd., which bought a stake in one of its oil fields, don’t take it over, creditors may have to sell the vessel at a discount to shore up cash for bondholders, he said.

“Now you’re relying on the valuation of the collateral package, and people discount it a lot,” Bonfim said in a telephone interview from New York. There are “all kinds of valuations to discount that package.”

Loan Payment

BNDES’s interest rate for the biggest portion of the OSX loan starts at 3.23 percent, and can be raised to 4.5 percent in January 2016 if OSX hasn’t completed two out of the four of its projects: oil platforms, drilling rigs, ships and pipe-laying support vessels.

The loan is almost entirely funded by Brazil’s Merchant Marine Fund, a division of Brazil’s Transportation Ministry that provides subsidized financing to the naval industry.

Principal on a 400 million-real bridge loan to OSX from BNDES is due next month, according to another document obtained by Colnago.

OSX declined to comment on whether it plans to pay the BNDES bridge loan due next month, saying “the company’s routine financial management includes balancing of short-term debts, whose maturity can be paid off or rescheduled.”

BNDES guarantees for the 1.4 billion-real OSX loan include a bank-backed letter of guarantee worth the loan’s value and another letter of guarantee from Batista worth 20 percent of the loan.

Shared Guarantees

During the first two years after completion of the shipyard, the amount of debt that the letter of guarantee covers can be reduced in exchange for dividends of OSX Leasing group. The letter of guarantees can also be phased out as collateral if OSX’s net assets reach 3.4 billion reais. Caixa Economica Federal, which is also lending 1.35 billion reais to OSX, shares guarantees with BNDES for the loans.

Guarantees that include OSX shares, future dividends and future net assets show that BNDES has been willing to accept less secure collateral than it usually demands from companies in its rush to get local companies to lead the country’s industrialization, according to Cesar Mattos, a legislative consultant with a joint doctorate in economics from Oxford University and Universidade de Brasilia.

Foreign companies would be less of a burden on public coffers, he said. Shares of OSX fell 87 percent to 1.34 reais in the past year.

Demands ‘Rigorous’

“Small and medium-size businesses say BNDES is rigorous with its demands for guarantees, so the question is why it isn’t so rigorous with bigger companies,” he said. “BNDES wants a certain level of national content so it may be willing to accept weaker guarantees.”

Congressman Colnago said he is collecting signatures from other legislators in an effort to start a congressional investigation into BNDES’s lending to Batista and other companies.

OSX along with port developer LLX Logistica are the most attractive of Batista’s assets for companies seeking fire-sale purchases to expand in Brazil, UBS AG analysts including Lilyanna Yang said in a note yesterday.

The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries rose one basis point to 215 basis points at 2:29 p.m. in Sao Paulo, according to JPMorgan Chase & Co.’s EMBI Global index.

Credit Approval

While Batista’s faltering empire is testing the value of the collateral on all credit extended to his companies, the loan approval process at Brazilian state banks required BNDES to be demanding in the guarantees it chose, according to Fernando Nogueira, a former vice president at Caixa who is now a professor at Universidade Estadual de Campinas.

“In a state bank, there’s a whole rite for approving a credit, and it passes through several committees,” Nogueira said in a phone interview from Campinas.

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