Brazil's OGX, creditors to meet as DIP loan sought -sources

Reuters

By Guillermo Parra-Bernal and Tom Hals

SAO PAULO/WILMINGTON, Del. Oct 7 (Reuters) - Brazilian oilproducer OGX Petróleo e Gas Participações SA is meeting withU.S. creditors in New York on Monday in a bid to jump-startrescue talks while banks scamper to arrange an emergency loanfor the company if no deal is reached, sources with knowledge ofthe situation told Reuters.

Creditors were set to meet with a new advisory team forcontrolling shareholder Eike Batista aimed at averting abankruptcy filing that could come as soon as this month, thesources said. OGX said last week that management is consideringall measures to protect assets and stay in business.

OGX sought out Goldman Sachs Group Inc, Barclays Plc and Credit Suisse Group to arrange adebtor-in-possession, or DIP, loan after failing to persuadebond and shareholders to fund the company until output starts atsome of its fields, said the sources, who declined to beidentified because the plans are private.

An OGX bankruptcy would lead to the largest-ever corporatedebt default in Latin America, involving $3.6 billion of bonds,according to Thomson Reuters data. Once a Brazilian courtaccepts a filing, the company has 60 days to negotiate withcreditors and present a corporate restructuring plan.

OGX missed a $44.5 million bond payment on Oct. 1 and saidit would not use a 30-day grace period to honor the debt.Pacific Investment Management Co, known as Pimco, the world'slargest bond fund, and BlackRock Inc, the world'sbiggest money manager, are among bondholders that stand to losemillions if OGX defaults.

Investors also worry that a lengthy legal battle is on thehorizon in Brazil, where recent debt restructuring andbankruptcy proceedings have turned out badly for them.

The price on the OGX bond due in 2018 tumbledon Monday to an all-time-low of 6.125 cents on the dollar, downfrom 9 cents on Friday. Shares of OGX, which are down 96 percentover the past year, shed 13 percent to 0.20 reais in São Paulo,its lowest close.

'GUINEA PIG'

OGX declined to comment. Repeated requests to AngraPartners, Blackstone Group and Lazard Ltd, OGXfinancial advisers, for comment were not answered.

Goldman, Credit Suisse and Barclays also declined tocomment.

While DIP loans are common in the United States, the sourcessaid bankers in New York are uneasy with the lack of precedentfor such a structure in Brazil. In the United States, DIP loansare the first debt that gets repaid; as a result, such loanstend to be a regular feature of bankruptcy cases and arecredited with saving companies and their employees fromfire-sale liquidations.

DIP financing in Brazil has a very short history, with arecent case being that of meatpacker Independencia SA, whichissued 261 million reais in DIP notes after filing forbankruptcy protection in 2009. The company was bought by JBS SA, the world's biggest meatpacker, in January but thebankruptcy protection process has not been concluded yet.

Brazilian law does not grant DIP lenders the sameprotections as U.S. law and advisers have been forced to come upwith creative workarounds to craft bankruptcy loans, said BillGovier, an attorney with Lesnick Prince Pappas in Los Angelesand a specialist in Latin American restructuring.

"It's tough being the guinea pig in these situations," saidone of the sources.

OGX is rapidly divesting assets, exiting explorationlicenses and reducing capital spending to focus on the mostprofitable parts of its portfolio.

Batista, who just a year ago was Brazil's richest man andthe world's seventh wealthiest with a fortune close to $35billion, is dismantling his Grupo EBX conglomerate of mining,energy and logistics companies because of a dearth of cash,surging debt and a plunge in investor confidence.

OGX, Batista and creditors are currently in talks to staveoff the collapse of the company, an event that could also bringdown Batista-controlled shipbuilder OSX Brasil SA,which is owed payments for the oil output ships that it hasbuilt and leased to OGX.

OSX has been told it will not be paid for the ships, anothersource told Reuters. One of the sources said that, while OGXlacks the necessary assets to avoid bankruptcy, OSX could besaved.

Yet, traders said the price on the OSX bond due in 2015 fell to as low as 72 cents on the dollar, arecord low, on concern the shipbuilder will be dragged intoOGX's bankruptcy.

The news for OGX, though, keeps getting worse. Last week, the company said it has certified reserves of 88 million barrelsof oil in its Tubarão Martelo field northeast of Rio de Janeiro,less than a third of what it thought it would be able to producefrom the area a year ago.

Brazil's oil regulator also told Reuters on Monday that OGXwill have to come up with new cash to develop three offshorefields the oil company considers uncommercial or lose them.

OGX said that there is a lack of suitable technologyavailable to develop the fields economically and asked the ANPto extend the deadline for development. If the ANP had approvedthe deadline it could have kept the fields, possibly sellingthem to finance investment or pay debt.

View Comments (0)