Brazil Tycoon Eike Batista’s Empire on Edge

June 20, 2013, 7:09 p.m. ET

Brazil Tycoon’s Empire on Edge

By LUCIANA MAGALHAES and JOHN LYONS

SÃO PAULO, Brazil—Just months after he unveiled it, Brazilian commodity tycoonEike Batista‘s bid to rebalance his unsteady oil, mining and shipping empire is nearly in tatters, overtaken by a shift in investor sentiment against emerging-market and commodity businesses like those owned by the former powerboat racer. The value of Mr. Batista’s assets has plunged, undermining a strategy set in March to raise capital by selling stakes in his companies to new partners to ensure the viability of his cash-intensive businesses.

The bond due in 2018 in Mr. Batista’s flagship oil company, OGX LLC,OGXP3.BR -4.60% reached the distressed level of 33 cents on the dollar Thursday. That compares with 88 cents on March 6.

“The price already indicates that investors are seeing a company in a scenario of liquidation,” said Marco Aurelio Guerra de Sa, head of the Latin American trading desk at Crédit Agricole Securities in Miami.

Spokesmen for Mr. Batista declined to comment.

But perhaps the strongest statement in declining confidence in the Batista empire came from Mr. Batista himself, investors say. In May, Mr. Batista sold around $60 million of shares in his flagship oil company at a rock-bottom price of between 1.57 Brazilian reais and 1.85 reais (70 cents and 83 cents) a share. The sales signaled to many investors that the businessman is desperate for cash, even though he said after that it was a minimal adjustment and that he didn’t plan to sell more shares in the company. OGX shares closed Thursday at 0.87 reais (39 cents), down 91% in the last 12 months.

Mr. Batista’s share sale has undercut his credibility, investors say, because there exists a long-standing separate agreement for Mr. Batista to buy some $1 billion in OGX shares at the higher price of 6.30 reais per share if the company needs it. Investors now question Mr. Batista’s ability and willingness to make that promised $1 billion purchase, seen as crucial to OGX finances.

As a result, the ratings firm Fitch downgraded OGX bonds June 14, stating “the unavailability of such funds would further pressure OGX’s ability to continue operating.”

It isn’t just Mr. Batista selling. Even after the recent plunge in asset prices, many investors say they wouldn’t consider investing in OGX or any other Batista ventures.

“The company [OGX] might run out of cash in 2014,” said Jack Deino, who helps manage $2.7 billion in emerging-market assets at Invesco Ltd. IVZ +0.27% in New York. He sold his OGX bonds in mid-2012, he said.

The potential outcomes for Mr. Batista aren’t good. Investors say the likelihood that Mr. Batista will need to negotiate a debt restructuring with bondholders and other creditors is rising fast. Several Brazilian banks, including Itau Unibanco Holding SA,ITUB4.BR -1.19% Banco Bradesco SA BBDC4.BR -0.65% and Banco BTG PactualSA, BBTG11.BR -2.62% had lent around $5 billion to Mr. Batista’s firms as of the end of March. People familiar with the loan agreements said Mr. Batista succeeded in rolling over a payment coming due to investment bank Itau BBA. Officials at Itau BBA declined to comment.

Another investor bet is that Brazil’s federal government will swoop in and support Mr. Batista: the “too big to fail” theory. Brazil’s state development bank, BNDES, holds shares in some Batista companies and lent the group more than $1 billion in 2012, and has an incentive to help him. At the same time, pumping more money into Mr. Batista’s companies would be politically unpopular for President Dilma Rousseff, who is already dealing with a series of mass protests fueled in part by disgruntlement about alleged crony capitalism.

The OGX bond-price plunge caps an enormous reversal of fortune for the flamboyant entrepreneur from Rio de Janeiro, who often vowed to become the world’s richest man, and nearly was. Mr. Batista took public a string of interdependent companies at the height of a frenzy for emerging-market shares beginning in 2006. He made “world’s richest” lists, with wealth valued at around $30 billion in 2011. The value of Mr. Batista’s assets plunged to $10.6 billion in March.

His companies haven’t hit their targets. Mr. Batista’s woes began in June 2012 when OGX announced oil production at a key field was far below its forecasts. That began a plunge in stock prices of the rest of his startups, which are mostly interconnected. For example, his shipping company OSX LLC was created to make oil platforms for OGX. And the ships to be made by OSX are to dock at a port being constructed by another Batista company, called LLX LLC. To raise cash and rebuild confidence, Mr. Batista relied on selling stakes of the companies. He sold an additional stake in his energy company MPX LLC to German utility E.ON SE EOAN.XE -1.54% for around $700 million in late March.

Mr. Batista’s recent turn of fortune may make him among the first and most high-profile casualties of a broad investor move away from emerging-market assets as the U.S. prepares to tighten monetary policy and big emerging markets like Brazil post slower growth rates. Stocks and currencies across the region are plunging, posing a hurdle to Mr. Batista’s efforts to rebuild confidence.

“I wouldn’t blame it all on Eike,” said Ed Kuczma, who helps manage $350 million in emerging-market shares at Van Eck and has never bought shares in Mr. Batista’s companies—and doesn’t plan to. “[The] global economy had a sharp and steep roadblock…and people have more realistic assumptions, and have become more careful.”