OGX Bankruptcy Filing Caps Batista’s $30 Billion Demise

OGX Bankruptcy Filing Caps Batista’s $30 Billion Demise

The oil company that transformed Eike Batista into Brazil’s richest man filed for bankruptcy protection today, culminating a 16-month decline that wiped out more than $30 billion of his personal fortune. The filing by OGX Petroleo & Gas Participacoes SA (OGXP3) puts $3.6 billion of dollar bonds into default in the largest corporate debt debacle on record in Latin America. OGX, a startup based in Rio de Janeiro, filed documents in a Rio business tribunal today, Sergio Bermudes, a lawyer representing Batista, said by telephone. An official at OGX’s press office, who isn’t an authorized spokesperson, declined to comment.The move marks the final chapter in Batista’s demise as poster child for Brazilian entrepreneurialism. First the Rio businessman raised billions of dollars in equity markets to fund OGX’s drilling program and other commodities startups. He then tapped debt markets, selling bonds to investors including BlackRock Inc. (BLK) and Pacific Investment Management Co. When some of the deposits he’d valued at $1 trillion turned out to be duds, OGX lost 98 percent of its value and ran out of cash.

“He got excessive leverage, the cash flow and the value expectations of the assets didn’t materialize and the market has been penalizing him with impatience,” said Terence Ortslan, who has known Batista since the mid-1980s and now heads Montreal-based research firm TSO & Associates. “You have to deliver and he didn’t.”

Failed Talks

Today’s filing, called a judicial recovery in Brazil, follows months of negotiations to restructure the dollar bonds, in which OGX sought to convert debt to equity and secure as much as $500 million in new funds. OGX said Oct. 29 that the talks concluded without an agreement. The company’s cash fell to about $82 million at the end of September, not enough to sustain operations further than December.

Restructuring talks were complicated by OGX’s cash burn and need to fund testing of its most promising oil field, Tubarao Martelo.

The oil company missed a $45 million payment on Oct. 1, prompting Standard & Poor’s to assign a default rating to $1 billion of bonds. Moody’s Investors Service and Fitch Ratings are giving OGX the 30-day grace period before calling a default. That period expires tomorrow.

While Batista is yet to decide, his shipbuilding company OSX Brasil SA probably will also seek protection against creditors, said a person with direct knowledge of the plans.

Regulatory Risk

By filing for bankruptcy protection, OGX risks having the country’s oil regulator revoke its 30 oil and natural gas licenses in Brazil, according to Sao Paulo-based TozziniFreire Advogados, a law firm that has clients in the oil industry.

The oil regulator, known as ANP, said by e-mail yesterday that the company would be allowed to keep its blocks under bankruptcy protection provided it has the funds to operate them.

Reserves-auditing firm DeGolyer & MacNaughton said Oct. 3 that Tubarao Martelo may hold as much as 108.5 million barrels of crude, compared with an OGX estimate last year of 285 million. The field is worth $439 million assuming a long-term oil price of $95 a barrel, Morgan Stanley analysts led by Bruno Montanari said in a Oct. 3 research report.

Bondholders of OGX hired Rothschild in August to advise on restructuring talks, while OGX enlisted Blackstone Group LP (BX), Lazard Ltd. (LAZ) and Sao Paulo-based Angra Partners as advisers. Creditors of shipbuilder OSX hired law firm Bingham McCutchen LLP in preparation for the restructuring of $500 million in bonds, two people briefed on the arrangements said Sept. 9.

Celpa Case

The bankruptcy of Centrais Eletricas do Para SA, or Celpa, provides an example of how difficult it is for bondholders to recover their investments in a Brazilian court, Jason Brady, who helps oversee $89 billion at Thornburg Investment Management Inc., said before OGX filed for bankruptcy.

Celpa, the largest power distributor in Brazil’s remote Amazon region, sought relief from creditors in February 2012, after fixed utility rates reduced earnings and debt surged. Bondholders received compensation of 17.5 cents on the dollar after the company was sold to Equatorial Energia SA.

“In the case of Celpa, the acquirer could offer better terms to the bondholder as the company continues to exist and thus there will be future cash flow generation,” Marco Aurelio de Sa, the head of fixed-income trading at Credit Agricole’s Miami brokerage, said in an e-mail before the announcement. “In the case of OGX, the recovery rate will depend on whether or not the company will continue to exist.”

Six Startups

The 56-year-old Batista started with a gold mine after returning to his native Brazil from Europe in the early 1980s. Riding a wave of investor appetite for commodities in the past decade, he listed six energy, mining and logistics startups since 2006 at the same time as advancing private projects from a Chinese restaurant in Rio to a semiconductors venture. By March of last year he’d amassed a $34.5 billion fortune, the world’s eighth biggest.

After losing investors’ confidence on mounting losses and missed targets, Batista has been trying to keep his empire afloat by selling pieces of his companies and shrinking operations. EBX Group Co., Batista’s holding company, is moving out of its headquarters, a 23-storey art deco building in downtown Rio, into smaller offices in Brazil ’s second-largest city, two people with knowledge of the move said Oct. 2.

EBX owed about $1.5 billion to Abu Dhabi’s Mubadala Development Co., three people with knowledge of the matter said in July. Itau Unibanco Holding SA, Brazil’s largest lender by market value, had about 5.5 billion reais in outstanding loans to EBX, two people with direct knowledge of the matter said in March. Batista borrowed about 4.8 billion reais from Banco Bradesco SA, they said. BTG Pactual’s outstanding loans to companies linked to Batista total about 650 million reais, a person with knowledge of the financing said in July.

Exceeded Repsol

OGX was the centerpiece of the group with a market value that surpassed established producers including Repsol SA during its exploration period. Batista has struggled to save his empire since mid-2012, when OGX began missing targets. On Aug. 15, the company posted a record loss of 4.7 billion reais for the second quarter and last generated a quarterly profit three years earlier, according to data compiled by Bloomberg.

Shares of OGX, which Batista founded in 2007, lost 96 percent in the past 12 months, the worst-performing stock among 73 members of the Brazilian benchmark Ibovespa Index after investors sold shares on missed output targets. Companies that file for bankruptcy protection will have shares suspended, the Brazilian exchange operator said in a statement last month.

Supplier Claims

Batista asked bondholders to convert $3.6 billion of debt into OGX stock, ceding control of the company and diluting existing shareholders to 10 percent of the stock, according to a September presentation posted on the company’s website Oct. 29. OGX released the presentations as part of an arrangement with bondholders after the failure of the restructuring talks.

OGX’s $2.56 billion in bonds due in 2018 trade at eight cents on the dollar.

Claims from suppliers amount to $546 million and OGX has delayed payments to sister company OSX. (OSXB3) The unsecured creditors including bondholders and suppliers may be entitled to between $5.1 billion to $6.8 billion in payments, OGX said in a Sept. presentation made by advisers Blackstone to note holders released as part of the negotiations.

OGX said Oct. 15 it fired Chief Executive Officer Luiz Carneiro amid negotiations with bondholders. Carneiro, which was replaced by Paulo Narcelio Simoes Amaral as OGX’s fourth CEO in 18 months, said in September that bankruptcy proceedings was a possibility and that Batista could lose control.

Total Debt

OGX, whose market value peaked at 75.2 billion reais in October 2010 without producing a barrel of oil, plummeted below 1 billion reais.

As of June 30, the last quarterly result reported by OGX, the company had 721.7 million reais in cash and total debt of 8.7 billion reais, according to data compiled by Bloomberg. An OGX default would be the region’s biggest, according to Moody’s Investors Service. OGX declared liabilities of 8.2 billion reais, Bermudes said today, adding that the company didn’t say how much its assets are worth. Sister company OSX didn’t request bankruptcy protection, he said.

“It’s unique in the timeframe that it went down,” said Cornel Bruhin, who manages $250 million of emerging market corporate debt at MainFirst Schweiz in Zurich. “If you see the value destruction since January, it’s really unique.”

Former Billionaire

The tycoon lost his title of Brazil’s richest in November and ceased to be a billionaire in July after Mubadala converted an investment in Batista’s EBX into debt. The net worth of Batista, who until early 2012 was vowing to become the world’s richest person, fell below zero earlier this year as his companies’ stock prices plunged, according to the Bloomberg Billionaires Index.

During his ascent in global wealth rankings, Batista maintained a high profile by appearing at business conferences in Brazil and abroad. He disappeared from public view this year. An avid Twitter user who posted almost 21,700 messages since 2010 and has more than 1.3 million followers, he last published on the social network May 29.

On July 19 he broke his silence by publishing an opinion piece in newspaper Valor Economico in which he promised to pay back debt and said auditors were partly to blame for building up shareholder expectations. He told the Wall Street Journal in an interview published Sept. 15 that he would make a comeback, mentioning the example of billionaire entrepreneur Elon Musk, founder of PayPal Inc. and electric carmaker Tesla Motors Inc.

“Elon Musk said starting a business is like eating glass,” Batista told the Journal. “I am eating glass.”

Abdicating Control

In October, the entrepreneur ceded control of port developer LLX Logistica SA and agreed to sell a controlling stake in an iron-ore port of its MMX Mineracao & Metalicos SA (MMXM3) unit to Amsterdam-based Trafigura Beheer BV and Mubadala. Batista uses the letter X in company names to symbolize wealth multiplication. He agreed on Oct. 29 to sell coal projects in Colombia to Turkey’s Yildirim Holding AS for about $450 million.

He stepped down as chairman of MPX Energia SA, the power generation venture he listed in 2007, after agreeing to share control of the unit with EON SE, Germany’s biggest utility. MPX was renamed Eneva SA and moved its offices out of EBX headquarters.

OGX, which counted Ontario Teachers’ Pension Plan as one of its early backers, raised a record 6.7 billion reais in Brazil’s biggest initial public offering in 2008. The company targeted annual production of 18 million barrels of oil by 2013, or almost 50,000 barrels a day, according to its prospectus.

Output Halt

OGX didn’t produce any oil in September after it shut all three wells at the Tubarao Azul field on pump failures. It produced 2.1 million cubic meters of natural gas per day, equivalent to 13,200 barrels per day, from the stake of its fields in northeastern Brazil’s Parnaiba Basin.

The company said in July it plans to abandon three offshore oil projects in the Campos Basin it had previously declared commercial and may halt development at Tubarao Azul next year if the field isn’t economically viable.

Batista sold OGX shares since March, cutting his stake in what once was his biggest holding by 11.1 percent to just over 50 percent to remain controller.

He said in an April 2010 video interview with brokerage XP Investimentos CCTVM SA that he was seeking to sell a 20 percent stake of OGX to improve valuation and visibility.

“We discovered a new oil province in Brazil, OK?” he said then. “OGX has now $1 trillion in oil value, oil in shallow waters that will have $8 lifting cost” a barrel.

Selling Assets

While a deal didn’t transpire then, earlier this year OGX agreed to sell a 40 percent stake in two Brazilian blocks for $850 million to Malaysia’s Petroliam Nasional Bhd, or Petronas. The transaction was suspended after the dismissal of CEO Carneiro, newspaper Valor Economico said today, without saying where it obtained the information.

In a bid to keep his commodities group afloat, Batista in August hired private-equity and consulting firm Angra Partners to oversee a reorganization of EBX along with Grupo BTG Pactual.

BTG, the bank controlled by billionaire Andre Esteves, scaled back its arrangement with Batista. The bank announced on March 6 a so-called strategic cooperation agreement, that included financial advisory, credit and future long-term project investments.

“You’re dealing with Brazilian law and I don’t know if there’s any precedent for this type of situation,” Gianna Bern, president of risk-management adviser Brookshire Advisory and Research, said by phone from Chicago before the filing. “This will be an interesting test of Brazilian bankruptcy law.”

An official at the court’s press office, who asked not to be named due to court policy, confirmed the filing by telephone.

The case number is 03776205620138190001

To contact the reporter on this story: Juan Pablo Spinetto in Rio de Janeiro at jspinetto@bloomberg.net

OCTOBER 30, 2013, 3:23 PM

Bankruptcy Filing Is a Stunning Fall for a Brazilian Tycoon


Updated, 8:35 p.m. | The flagship company of the Brazilian entrepreneur Eike Batista, who once boasted that he was on his way to becoming the richest man in the world, filed for bankruptcy on Wednesday. The filing by the petroleum company OGX was a stunning fall for Mr. Batista, who was once a symbol of Brazil’s rapid rise as a global economic power but more recently has come to represent a Brazilian elite that views itself as above the rules that govern the most of the country.

The bankruptcy filing was the culmination of a decline that had been apparent for months. It became nearly certain after OGX missed a $45 million bond payment on Oct. 1. According to papers filed with the Court of Justice of Rio de Janeiro, the company’s total debt is 11.2 billion reais ($5.1 billion), making this filing the largest corporate default in the history of Latin America. The company owes $3.6 billion to bondholders, most of them foreigners, with the rest of the debt to suppliers and banks.

Pimco, the world’s largest bond investor, and BlackRock, the world’s largest asset manager, both invested in OGX and stand to lose from any bankruptcy filing.

Mr. Batista’s rise and fall closely mirrors the fortunes of his country, which was growing rapidly a couple of years ago, driven by the worldwide boom in commodities, but has since faltered. The Brazilian stock market has fallen more than 11 percent this year, even as the major stock markets around the world have been gaining. And street protests this summer reflected Brazilians’ resentment that the government had channeled resources to projects controlled by tycoons like Mr. Batista.

On Wednesday, his countrymen seemed to be watching Mr. Batista’s downfall with glee, with websites and Twitter accounts filled with jokes about his travails. One tweet: “Eike trading in his Xbox for an Atari.” And another: “OGX shares now worth less than a piece of candy ha ha ha!”

OGX went public in 2008, raising $4.1 billion in the Brazilian stock market in what was then the country’s largest-ever initial public offering of stock. Now, its future is under a cloud.

The bankruptcy process in Brazil could be long and tortuous. Of the about 4,000 companies that have entered court-supervised restructuring since the procedure was established in the country in 2005, only about 1 percent have successfully left the bankruptcy court’s supervision, according to a study by the newspaper O Estado de São Paulo.

Only 23 percent even managed the first step, which is to have a creditors’ assembly approve the restructuring plan. Many cases are fought over in Brazil’s notoriously slow justice system, where appeals can drag on for years.

Márcio Costa, a partner in the Rio de Janeiro law firm Sérgio Bermudes, which handled the bankruptcy filing, said on Wednesday, “OGX has high debts, but restructured, the assets are sufficient for the company to be viable.” He said he was optimistic that negotiations with creditors would be successful.

OGX has pursued many avenues to try to stave off bankruptcy. Rumors have swirled about possible new investors, especially after the company dismissed its chief executive and chief legal counsel on Oct. 15.

OGX confirmed on Oct. 17 that it was talking to the Brazilian investment firm Vinci Partners and other firms about restructuring options, but no deal has been reached.

Its sister company, OSX, whose primary business is building ships and marine architecture for OGX’s petroleum exploration operations, said this week in a note that it did not expect to seek a bankruptcy court’s protection “at this moment.” OSX’s debts were listed in its balance sheet at $2.4 billion at the end of the second quarter, and it, too, has little cash flow. But unlike its sister company, OSX has easily marketable assets, including oil rigs, and most of its short-term debts are with government-controlled banks that have already agreed to reschedule some payments.

Thomas Felsberg, a bankruptcy lawyer in São Paulo, said Brazilian bankruptcy courts almost always approve a company’s initial request for protection, as long as the documents are in order, and such approval does not contain any judgment about a company’s chances of emerging from bankruptcy.

If the request is approved, the company has a 180-day period in which it is protected from creditors’ demands.

Documents released on Tuesday on OGX’s website indicate that the company will run out of cash in December and needs $250 million in new money to continue operations through April 2014.

That money could come from selling its natural gas subsidiary OGX Maranhão and from a possible investment by the Malaysian petroleum company Petronas in one of OGX’s offshore petroleum blocks, the company’s documents said. The bankruptcy filing concluded with the statement that OGX had reached an agreement to sell its share in OGX Maranhão, though no details were given.

Mr. Batista won international fame for his plans to build an empire of energy, mining and logistics companies. For several years, OGX announced one petroleum find after another, and the share prices of all six of Mr. Batista’s publicly traded companies soared on the São Paulo stock exchange. But none of the companies managed to become profitable in time to service their billions in debt.

Mr. Batista’s personal worth, which at one point last year exceeded $30 billion, is now estimated at well under $1 billion. Minority shareholders in OGX are suing both the company and Mr. Batista for what may have been misleading statements about OGX’s supposed petroleum finds and for possible instances of insider trading.

Brazil’s securities regulator, known as the C.V.M., announced in September that it was investigating Mr. Batista and other senior managers of OGX for possible violations of disclosure rules.

Marcus Sequeira, Latin America petroleum analyst for Deutsche Bank, said it was clear several years ago that OGX was not going to be as successful as hoped.

In April 2011, OGX issued a report in which it claimed over 10 billion barrels in reserves. But to reach that number, the company added together different kinds of reserves, most merely possible rather than confirmed or even probable.

Although this discrepancy was in the 2011 report for anyone to see, few paid attention to it, Mr. Sequeira said. “It is the same in every bubble. At some point, everyone only wants to hear the good news.”

Looking forward, Mr. Sequeira said he was “not optimistic” about OGX’s fate, since “the resource base is clearly not as big as the company was saying.”

But since there is some oil in OGX’s fields, Mr. Sequeira said, it might be possible, if a new investor is found, for production to resume and bondholders eventually to get a portion of their money back, though shareholders would probably be wiped out.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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