By Sabrina Lorenzi and Jeb Blount
RIO DE JANEIRO, Oct 30 (Reuters) - OGX Petróleo e GasParticipações SA, the Brazilian oil companycontrolled by former billionaire Eike Batista, sought courtprotection from creditors on Wednesday in Latin America'slargest-ever corporate bankruptcy filing.
The bankruptcy protection request, filed in a Rio de Janeirocourt, came after OGX failed to reach an agreement withcreditors to renegotiate part of its $5.1 billion debt load. The request marks another chapter in the unraveling of Batista'sonce high-flying industrial empire, which he has beendismantling in recent months after disappointing output fromoffshore OGX wells set off a crisis of investor confidence.
If the court approves the request, OGX will have 60 days tocome up with a restructuring plan. OGX creditors, which includethe California-based bond fund Pacific Investment Management Co(PIMCO), and U.S.-based investment fund BlackRock Inc,will then have 30 days to endorse or reject the plan.
It is too early to know how long a restructuring could take,but in Brazil's slow-moving judicial system, some bankruptcyproceedings take years. The company's fate could depend onwhether OGX, even as it restructures, honors contractualobligations with the government in the oil fields it operates.
An OGX bankruptcy is unlikely to have a significant effecton Brazil's economy. The company is barely out of its start-upphase and produces almost no crude oil, and most of its debt isheld by foreign bondholders.
Still, Batista's decline has become a symbol of Brazil's owneconomic woes. After a decade-long boom in which investorspoured cash into Brazil and Batista's enterprises, LatinAmerica's largest economy has been in a rut for three years.
And the fate of sister company OSX Brasil dependsalmost entirely on OGX, whose market value has plummeted bynearly $45 billion since October 2010. Batista created OSX,which had to scale back efforts to construct the largestshipyard in the Southern Hemisphere, to build and lease oilproduction and service vessels to OGX.
OGX's decision to seek protection from creditors came as nosurprise. After missing a $44.5 million interest payment owed tobondholders on Oct. 1, OGX scrambled to restructure its debtbefore the end of a 30-day grace period or be declared indefault on $3.6 billion in bonds.
The process was rocky from the outset, and OGX called offthe talks with creditors on Tuesday, leaving a bankruptcy filingas the only viable option to buy it more time.
"We knew it was coming. Even the shoeshine boy told us aboutthis," said Dan Fuss, vice chairman and senior portfolio managerat Loomis Sayles, which oversees $193.5 billion in assets undermanagement, including OGX bonds.
OGX declined to comment.
In its bankruptcy filing, OGX lawyers said the company's 10billion real (US$4.6 billion) exploration campaign was ahigh-risk venture and that these risks were clear to investorsfrom the start.
Lower output from its first field and the cancellation oftwo others was bad geological luck, the lawyers wrote.
"Once we restructure our debt and make our capital structureadequate, OGX will have a prosperous future, able to generatewealth for its shareholders, workers, creditors and forBrazilian society," the filing said.
A renowned dealmaker who once boasted he would become theworld's richest man, 56-year-old Batista has seen his personalfortune reduced by over $30 billion in the last 18 months asinvestors punished the share price of his listed companies.
The downward spiral forced Batista to start breaking up hisGrupo EBX conglomerate, which also included a port operator,mining and energy interests, and an entertainment company. (Fora FACTBOX on the unraveling of EBX, see )
RACING TO PUMP OIL
Brazil's 8-year-old bankruptcy law is similar to U.S.Chapter 11 proceedings, and gives OGX a chance to reduce itsliabilities and emerge as a going concern. Bondholders will playa key role in the process, though in recent cases - such asthose of power companies Celpa SA and Grupo Rede Energia SA - some creditors complained that judges privilegedthe claims of state-owned banks over theirs.
Indeed, bankruptcy cases have not always moved smoothlythrough Brazilian courts and some judges have been sympatheticto pressure from different stakeholder groups like employees,pensioners and shareholders, at times putting their interestsabove those of creditors, said Paulo Rabello de Castro, head ofSR Rating, a Brazilian credit rating agency.
Investors worldwide will be watching as the OGX proceedingsunfold. If bondholders feel they are not treated fairly in therestructuring process, foreign investors may think twice beforeinvesting in other Brazilian companies, analysts say. (For aFACTBOX on Brazil's bankruptcy law, see
PIMCO and Blackrock declined to comment. PIMCO held nearly$387 million worth of OGX bonds in registered funds at the endof June, according to the latest data provided to Lipper.
OGX is racing to start output at its offshore oil fieldTubarão Martelo field by the end of November, its best hope fora source of revenue. Failure to get Tubarão Martelo producingwill make it harder to find an investor to buy all or part ofthe field and could lead to the breaking of contractualobligations to Brazil's oil regulator, the ANP.
While the ANP has said a bankruptcy filing would notautomatically cause OGX to lose its production leases andexploration rights, it stressed that any failure to meet theconditions of these contracts would result in their loss. Thatwould strip OGX of any chance of generating future revenue.
The company needs about $250 million of debt or equityfinancing to keep operating through April 2014, it said in arecent presentation to bondholders. Without new financing, OGXsaid it would run out of cash in the last week of December.
During talks, OGX and the bondholders discussed a potential$150 million credit line aimed at funding the company'sexploration campaign for a few more months. But there wasdisagreement over Batista's plan to have bondholders convertdebt into equity as well as the terms of his potential departurefrom the company, sources told Reuters last week.
Bankruptcy judge Gilberto Faria Matos will have to decide ifoutput from Tubarão Martelo and other offshore and onshore areasare sufficient to keep the company operational and allow forsome repayment to creditors.
The main sources of revenue for a future OGX would be itsshare of $17.2 billion of offshore oil and natural gas revenuefrom its Tubarão Martelo field and BS-4 block, the company saidin the bankruptcy filing.
"I think there is some value in OGX's offshore assets," saidan oil executive who has seen geological data about OGX'sprospects and fields. "If the price is right I think someone maywell buy them and that they could produce pretty well."
FROM RECORD IPO TO BANKRUPTCY
OGX was founded in 2007 and raised $1.3 billion from privateinvestors to buy oil concessions in November of the same year, amonth after state-run Petroleo Brasileiro SA, orPetrobras, announced the discovery of a giant offshore oilprovince south of Rio de Janeiro.
Seven months later, Batista raised 6.7 billion reais ($4.1billion) for OGX in an initial public offering in what was atthe time the biggest IPO in Brazilian history.
A year after that he was drilling wells. A period of rapidsuccess in finding oil led OGX to briefly outstrip Petrobras asthe most successful explorer in Brazil by strikes registered.
OGX pumped its first oil in January 2012, but by mid-year itbecame clear that the field would not produce near expectationsand the company's stock began a drawn-out decline.
In the last year alone, OGX's share price has plunged about95 percent, making it the worst performer on the BM&FBovespaStock Exchange's main index.
The case is docket number 0377620-56.2013.8.19.0001, in the4th Section of the Corporate Division of the Justice Tribunal ofRio de Janeiro State.
- Investment & Company Information
- Eike Batista