OGX Upheaval Portends Deeper Bond Loss for Pimco: Brazil Credit

In the past 10 days, Eike Batista fired his chief financial officer and hired his fifth restructuring adviser as the ex-billionaire tries to save OGX Petroleo & Gas Participacoes SA.

That’s left bondholders with even deeper losses as the company careens toward Latin America’s biggest corporate default. The oil producer’s $2.56 billion of debt due 2018 has tumbled 5.3 cents to 15 cents on the dollar since Sept. 20, when it announced the departure of Roberto Monteiro, who had led negotiations with creditors. Four days later, the Rio de Janeiro-based company hired Lazard Ltd. to work alongside advisers including Blackstone Group LP in the talks.

Pessimism that bondholders led by Pacific Investment Management Co. can recoup their money is deepening as OGX is set to miss a $45 million interest payment due tomorrow, according to two people with direct knowledge of the plan. If OGX can’t persuade creditors or other partners to provide debt relief and an immediate infusion of funds, bondholders may end up with nothing, JPMorgan Chase & Co said. The notes have already plunged 74.9 cents this year, the most in emerging markets, as OGX missed production targets and depleted its cash.

“It’s negative for the credit,” Marco Aurelio de Sa, the head of fixed-income trading at Credit Agricole SA’s Miami brokerage unit, said in a telephone interview. “If you’re changing the common line at the peak of the credit negotiations, it shows there are major disagreements between management and the controlling shareholder.”

Delay Agreement

OGX declined to comment on the status of bondholder negotiations, international debt payment plans or Monteiro’s firing. Parent EBX Group Co. didn’t respond to an e-mailed request seeking comment.

The company’s decision last week to postpone payments on 2.1 billion reais ($932 million) of local bonds held by its OGX Austria unit means the oil producer will not pay the Oct. 1 coupon on its $1.06 billion of dollar debt due 2022, said the people with direct knowledge of the plan, who asked not to be identified as the details haven’t been made public.

The unit agreed to delay a Sept. 25 payment for an undisclosed amount until March 25, OGX said in a regulatory filing.

The notes due 2022 fell three cents today to 14 cents on the dollar as of 12:50 p.m. in New York, according to prices compiled by Bloomberg.

Burn Rate

Sao Paulo-based magazine Veja reported in its Sept. 28 “Radar” column that OGX and OSX, Batista’s provider of services to the oil and gas industry, will file for bankruptcy protection in two weeks, without saying how it got the information.

While the companies’ press offices didn’t immediately respond to phone calls and e-mails from Bloomberg News yesterday seeking comment, OSX later commented in an e-mailed statement that it’s unaware of a move to file for bankruptcy protection.

Batista’s flagship oil producer was set to run out of money by early September based on its burn rate through the end of the second quarter, according to data compiled by Bloomberg.

An OGX default would mark the latest in a string of setbacks for Batista, who’s been struggling to raise funds to keep the company from running out of money after his estimated personal fortune plummeted 99 percent this year.

The company hired former Brasil Telecom CFO Paulo Narcelio Simoes Amaral last week to replace Monteiro. Chief Executive Officer Luiz Carneiro said Sept. 12 that the company would probably ask bondholders for more cash as part of a debt-restructuring plan.

Recovery Scenarios

Negotiations were going “very well,” he said at the time.

OGX will ask investors for at least $250 million in capital as part of a restructuring of its $3.6 billion of bonds, two people with direct knowledge of the situation told Bloomberg News earlier this month.

The company wants the cash to continue operations long enough to start pumping oil from its Tubarao Martelo field. OGX declared extraction efforts at Tubarao Azul, its only producing field, economically unviable in July.

A group of OGX creditors, led by Pimco, have hired Rothschild Inc. as financial advisers and law firm Cleary Gottlieb Steen & Hamilton LLP to represent them.

Pimco spokesman Michael Reid didn’t respond to telephone and e-mail requests seeking comment.

“If the company cannot raise additional capital, the potential value associated with Martelo may never be realized,” Daniel Sensel, an analyst at JPMorgan, wrote in a report to clients dated Sept. 19. “If OGX cannot find another source of liquidity, we believe recovery could be zero.”


If OGX and its creditors can’t overcome obstacles including how much capital to provide, how much of OGX that shareholders would be left with, and what role, if any, Batista will have in the company, negotiations could end without an agreement and a “lose-lose bankruptcy filing,” according to the report.

JPMorgan cut its recommendation on the bonds to underweight from neutral. Sensel declined to comment beyond the report.

In addition to Lazard and Blackstone, Batista has turned to Sao Paulo-based Angra Partners and Grupo BTG Pactual this year to help oversee the reorganization efforts for his holding company and oil producer and to lead discussions with stakeholders.

EBX hired Eduardo Gouvea Vieira, the former head of Rio de Janeiro-based industry lobby group Firjan, in January as a vice president to advise on restructuring the group.

‘Real Incentives’

He left in March after Batista’s holding company reached a partnership with BTG Pactual. The bank is no longer involved in OGX’s restructuring, newspaper Valor Economico reported Sept. 6.

BTG Pactual is only advising the mining, electricity and port companies that Batista controls or has stakes in, it said in an e-mailed response to questions.

Daniel Kastholm, a managing director at Fitch Ratings in Chicago, said OGX and its stakeholders are likely to come to an agreement to fund the company until production begins at Martelo, which is located about 58 miles (93 kilometers) off the coast of Rio de Janeiro.

“At Martelo, there’s some real incentive to get that producing,” Kastholm said in a telephone interview. “It’s tougher to liquidate than you think. I’m assuming there’s going to be an arm’s-length restructuring.”

Extra Yield

The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries climbed four basis points, or 0.04 percentage point, to 243 basis points today in New York, according to JPMorgan index data.

The cost of protecting Brazilian bonds against default for five years climbed four basis points to 178 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.

The real gained 1.3 percent to 2.2232 per U.S. dollar. Yields on interest-rate futures contracts due in January rose six basis points to 9.37 percent.

Brazil ranks 143 out of 185 economies, below countries including Egypt, Argentina and Pakistan, when it comes to settling insolvencies due to weaknesses in existing law and procedural and administrative bottlenecks that slow bankruptcies, according to the World Bank’s Doing Business project.

The process takes about four years, more than twice as long as in the U.S., while recovery rates average 15.9 cents on the dollar versus 81.5 cents.

Monteiro’s ouster indicates Batista is seeking better terms from creditors in negotiations, according to Fabiano Santin, a fixed-income analyst at Kondor Invest in Sao Paulo.

“The bondholders wouldn’t want to go into bankruptcy in Brazil,” he said in a telephone interview. “They’ve already been advised by lawyers that they have fewer rights in Brazil than in the U.S. and should avoid it at all costs.”

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