Delays, clashes hinder attempts to salvage Batista's OGX

Reuters

By Guillermo Parra-Bernal, Jeb Blount and Nick Brown

SAO PAULO/RIO DE JANEIRO/NEW YORK, Oct 28 (Reuters) -A ttempts to save Eike Batista's flagship oil company, thebusiness most responsible for the meltdown of his oncehigh-flying industrial empire, have been hampered by internalconflict and unpredictable decisions by the Brazilian tycoon,sources with direct knowledge of the situation told Reuters.

The difficulty of reading Batista, who less than 18 monthsago owned the world's seventh-largest fortune, and mixed signalsfrom advisors and managers to his companies, has disruptedattempts to renegotiate about $5 billion of bond and bank debtsat OGX Petróleo e Gás Participações SA. Meanwhile,the company is running out of cash to keep its operations going.

Even as new investors sign up to invest in other companiesin Batista's Grupo EBX energy, mining and logisticsconglomerate, the conflicts and delays at OGX risk turning abankruptcy filing, that is widely expected by investors, into amessy affair rather than opening the way to a smoothrestructuring, the sources said.

At worst, if delays continue, OGX could even faceliquidation, which would leave precious little for creditors,one of the sources said, though this is seen as unlikely.

A bankruptcy filing by OGX would be the biggest ever by aLatin American company, according to Thomson Reuters data. Notonly would it be a sign of how far Batista's star has fallen,but it would also provide a stiff test of whether Brazil'seight-year-old bankruptcy law provides adequate protection tocreditors.

Batista's dramatic decline has become a symbol of Brazil'sown economic woes after the end of a decade-long boom that madeit one of the world's hottest emerging economies. If foreigninvestors do not feel they have been treated fairly in therestructuring process they may be less willing to invest inother Brazilian companies.

The delays in restructuring have left OGX out of cash and atrisk of having Brazil's government revoke oil leases, thecompany's main asset. While a bankruptcy would not automaticallylead to a cancellation of the leases, OGX needs to find new cashquickly to meet minimum capital spending requirements with thegovernment, Brazil's oil industry watchdog ANP said on Oct. 17.

A 30-day grace period that OGX has to deposit $44.5 millionin interest payments to bondholders ends on Thursday. OGX hasbeen trying to convince holders of $3.6 billion in bonds toconvert them into shares and pour an additional $150 millioninto the company so that it does not have to shut down itsoperations. OGX also faces a $100 million bond interest paymentin December.

Building a consensus among creditors, shareholders andBatista himself is essential so that OGX can file for bankruptcyprotection and then move the restructuring process quicklythrough the courts, preventing OGX from defaulting on itscontractual agreements with the ANP, two of the sources said.

"Bankruptcy is the only option right now," one of thesources said.

Debt holders include Pacific Investment Management Co, whichruns the world's largest bond fund, and BlackRock Inc,though it is not clear how much they currently own. Pimco andBlackrock both declined to comment.

In the past year, OGX shares have fallen more than 90percent, the result of lower-than-expected output from its firstoffshore field and as it has cut into its cash reserves becauseof spending to prepare other fields to start producing oil. TheOGX plunge set off a chain reaction among Batista's other listedbusinesses, forcing him to bring in new investors and dilute hisown holdings while being unable to use his remaining shares ascollateral for loans needed by the companies.

In interviews with six sources with knowledge of therestructuring discussions, one called the OGX talks withcreditors a "circus" and another described them as a "mess."Three said Batista's mercurial style has made things harder foreveryone involved and exacerbated conflicts between a tangledweb of advisers.

The advisers taken on by Batista include high-pricedcorporate cleanup men, seasoned dealmakers and even Batista's89-year-old father, a former Brazilian mining minister and theformer chief executive officer of Vale SA, theworld's top iron ore miner.

"Every day is a new adventure," said one of the sources."You can't tell what he is thinking," the source added referringto Batista, who in Brazil is widely known as just "Eike."

HOLDING UP

Batista declined repeated interview requests through EBX.His lawyer and chief aide did not respond to questions. Once afixture in the Brazilian society pages, the 56-year-old formerpower-boat racer has all but disappeared from the public eyesince the dismantling of EBX began.

OGX and its sister shipbuilder OSX Brasil SA declined to respond to an e-mailed list of questions.

Some people say that Batista is working hard to try to keephis companies operating and is actively searching for newfinancing.

R. Blair Thomas, CEO of EIG Global Energy Partners LLC, theU.S. company that agreed in August to invest 1.3 billion reais($596 million) in Batista's LLX Logística SA,recently had dinner with Batista in Rio de Janeiro, and foundhim to be in good spirits.

"While there is still work to do, he has successfullybrought in international investors for three of his companies,"Thomas said. "There is a general recognition in the market thatsome of the assets were quite good."

Indeed, Batista, known as an unabashed optimist, promised acomeback in a July 9 op-ed piece in a Brazilian newspaper.

"Over the past few months, I have seen my business obituaryin the pages of blogs, newspapers and magazines. I see myselffar from that image of a retired Eike," he wrote.

While, according to two of the sources, Batista will likelyhave to give up most or all of his entire stake in OGX tobondholders, he retains 27 percent of the capital of Eneva SA, a power producer he founded and formerly known asMPX Energia SA; a controlling stake in mining company MMXMineração e Metálicos SA after selling its portoperations; and a 21 percent stake in LLX, owner of the giantPort of Açu compound north of Rio de Janeiro.

FIRED EXECUTIVES

The situation at OGX has already held up a plan by Malaysianstate oil company Petronas to pump $850 million intoOGX and complicated efforts to get new financing frombondholders and banks. Petronas wants a debt restructuring tohappen before any payment.

One major example of the disruptions arising from Batista'ssharp changes in direction involved negotiations with OGXcreditors. On Sept. 20, Batista abruptly fired OGX ChiefFinancial Officer Roberto Monteiro - the main liaison betweenthe company and creditors. Talks screeched to a halt.

Soon after, advisers as well as OGX CEO LuizCarneiro convinced Batista to bring the former CFO back - thistime as a consultant. But on Oct. 15, Batista fired the formerCFO again and then showed the CEO and the legal affairs directorthe door too.

The clash with OGX management began when Carneiro announcedearly in September that the company would exercise a put optionobliging Batista to buy $1 billion in shares at above-marketprices. Batista is challenging the put option in court.

Realizing minority shareholders planned to sue Batista andOGX executives, Carneiro felt he had no choice but to exercisethe option, forcing his interests to diverge from Batista's, oneof the sources said. Carneiro and Monteiro could not be reachedfor comment.

"All Batista wants is to get out of this put option," oneof the sources said. "Almost every piece of debt on each ofthese companies is guaranteed by him personally."

Two of the sources said the ousting of the executivesoccurred after an unnamed "new investor" pledged cash for OGX ifnew management were hired.

MORE CONFUSION

In another sign of confusion, three scheduled board meetingsat Batista's shipbuilding company OSX have been canceled sincenew directors were named on Sept. 11. OSX depends on OGX for allits revenue and two of the sources said the shipbuilder willlikely request bankruptcy protection at the same time as OGX orshortly thereafter.

The lack of meetings has prevented the board from reviewingor guiding the work of OSX CEO Marcelo Gomes, who was appointedon Aug. 23 and is busy trying to sell OSX ships and otherassets. Gomes could not be reached for comment.

One of the big problems in the restructuring talks has beenthe number of different advisers working for Batista and hiscompanies, three of the sources said.

Brazilian investment banker André Esteves' Grupo BTG PactualSA had been heavily involved on the advisory sidebut its earlier attempt to rescue Batista's companiesconcentrated on MMX, LLX and the former MPX. BTG Pactual, whichdeclined to comment, is "in the final stages" of its financialadvisory mandate with Grupo EBX, a source with knowledge of thesituation told Reuters.

As BTG Pactual focused on those three companies instead ofOGX and OSX, Batista and his managers hired three additionaladvisory firms to handle the problems facing the oil producerand the shipbuilder. But the advisers have not always had thesame agendas and their failure to work in lock-step helped causethe clashes of recent months, the sources said.

The three financial advisers are Blackstone Group LP and Lazard Ltd, and Rio de Janeiro-based buyout andadvisory firm Angra Partners. Angra has had the most influentialrole in OGX's debt restructuring, one source added. The threefirms declined to comment.

Carneiro's departure bolstered the influence of Angra, whichis led by dealmaker Ricardo Knoepfelmacher, two of the sourcessaid. Knoepfelmacher, known in Brazil as "Ricardo K," has triedto steer OGX and shipbuilder OSX toward bankruptcy protection tosave them.

Meanwhile, as negotiators huddle in boardrooms in Rio deJaneiro and New York, OGX employees are literally at sea, usingwhat two of the sources said was what little cash the companyhas left to make a last-ditch effort to hook up its offshoreTubarão Martelo field to an OSX vessel, hoping it can startproducing within weeks.

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