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Sunday, 22 October 2017

X-rated empire pawned

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  • The headquarters of OG, the Brazilian oil company controlled by former billionaire Eike Batista

Many astute moneymakers invested heavily in OGX, a testament to greed or the desperate and never-ending hunt for yield – and to the efficacy of Eike Batista’s sales patter. 

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To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com.

 

In Arthur Miller’s play Death of a Salesman, Willy Loman, having just been fired by a boss he hates, seeks succour from Charley, his successful, wise-cracking neighbour, who dispenses a little timeless advice. “The only thing you’ve got in this world,” he tells the anti-hero Loman, “is what you can sell”. Eike Batista would do well to read Miller’s enduring work, still trotted out in playhouses around the world. The flamboyant Brazilian, one of his generation’s great salesmen, listed in 2012 by Forbes as the world’s seventh-richest man, now drifts, as Loman did, in a sort of zombified financial half-life.

Batista’s X-rated empire, which once included companies from MMX (mining division) and LLX (logistics), to OSX (shipbuilding) and MPX (energy) is now eviscerated, its constituent parts either under water or owned by foreign corporates. His flagship energy firm OGX, once viewed as the embodiment of a renascent Brazil, skulks in receivership, its bonds worth a tiny fraction of their face value.

The X affixing each of his former corporate vehicles was originally dreamed up by the man once known as the PowerPoint King for his ability to sell anything to anyone, as a marketing ruse, denoting the multiplication of wealth to be made by willing investors. It now seems like a tasteless joke.

The latest round of pain was meted out to bondholders, with cruel irony, on Valentine’s Day. After three false starts in early 2014, on February 14 OGX finally filed a restructuring plan that, if followed to the letter, will cede control to creditors and leave stockholders with just 10% of a group valued in October 2010, at the height of its power and influence, at US$34bn.

If approved, creditors, including the US investment giant Pimco will exchange US$5.8bn in debt owed by the group for shares equivalent to 90% of capital. Batista will see his stake in the group cut to 5.02% from 50.2%, with other shareholders owning 4.98%.

Trustees Deloitte have until March 17 to assess objections to the restructuring programme; they can then choose to submit the plan for creditors’ approval as is, or, depending on the gravity and severity of any received objection, delay it for months. The latter outcome seems likely. A group of 40 minority investors led by Aurelio Valporto, an independent economist and OGX shareholder, have already filed a lawsuit against Batista, seeking to recoup up to R$100m (US$43m) in claimed losses.

Valporto, who complains of minority shareholders being “brutally diluted”, said the restructuring plan precludes a 2012 put option, which required Batista to inject US$1bn of his own money into the firm if it ran into trouble. Analysts believe it was its removal that finally convinced a wavering Batista to put pen to paper over the restructuring programme.

Sam Aguirre, a senior managing director in Sao Paulo at business advisory outfit FTI Consulting, said the restructuring plan “will likely be amended as a result and its submission for creditors’ approval will be delayed”. Other experts expect no formal approval of the plan until June or July.

Last gasp

An injection of US$125m scheduled for the end of February (the first tranche of a US$215m capital injection, announced on February 7 by 10 bondholders and split into two tranches, including US$90m due in April) is already delayed due to procedural issues. That investment is effectively a last-ditch effort to fund the group’s only viable asset, the Tubarao Martelo oil field, off the coast of Rio de Janeiro.

A significant delay in funding would create its own fresh set of headaches, each potentially more painful than the last. OGX desperately needs US$125m in fresh capital just to pay staff, service providers and the company’s legal and financial advisers, said Aguirre. If it can’t stump up the cash, Brazil’s labour unions would likely “take action”, leading to a “high probability” of judges liquidating the company’s accounts and placing it in full bankruptcy. Ergo, exit the restructuring plan.

Of course, none of this may happen. Events remain in flux, and could change in any number of ways as spring rolls into summer. Creditors, including cranky minority shareholders, may withhold any complaint, allowing the restructuring plan serenely to sail through. Even that won’t save Batista from a series of personal lawsuits likely to dog the man once seen as the modern face of a rising nation until the end of his days.

Rising from the dead?

Perhaps the biggest remaining question is how much money leading creditors can scoop from the broken shell of a once seemingly impregnable empire. There remains an outside chance, remote but not impossible, that the corpse of OGX could yet flicker back to life. The group’s dream scenario currently involves a nexus of admittedly unlikely events: a spike in both the price of oil as well as production at the Tubarao Martelo field, wedded to the sudden revival of Brazil’s flagging economy.

“There is the possibility that [OGX’s] wells become more profitable and productive, and the company can grow from a much smaller base,” said Rafael Elias, head of Latin America credit strategy at Credit Agricole.

“If everything happens exactly to order, in exactly the perfect way, the equity play may be attractive, however the market would already reflect that in the price of the bonds today,” said Aguirre.  

It’s notable that the value of OGX’s bonds has barely budged since the investment programme unveiled on February 7, and the restructuring plan lodged a week later. Prior to OGX’s bankruptcy filing in October 2013, which put US$3.6bn of dollar-denominated bonds into immediate default, the firm’s 2018 notes were trading at 8% of their face value. Since then, their value has slipped further, to 5%.

Some investors, notably US investment giant BlackRock, opted quietly to cut its losses, selling its entire stock of OGX bonds in January, during restructuring talks. At this stage, it’s hard to envisage what could boost the face value of OGX’s bonds, said bankers.

“Even if they doubled from 5% to 10%, that would have been something,” said Aguirre. “For very late investors, who came in at the very bottom, it could even have been a home run. The investors that replaced BlackRock [perhaps] believed that they could squeeze some money out of the deal immediately, but so far they’ve been wrong.”

Many still have a great deal of sympathy for both OGX and its creditors, if not for Batista himself. “No one deserves to be in the situation we have right now,” said Credit Agricole’s Elias. “This is a market that by its nature is high risk and high reward, so these things happen. You win some and you lose some, especially when you are invested in high-yield emerging markets. That’s the risk you take.”

Yet that view, while both laudable and broadly shared across the market, also overlooks the point. OGX was after all a triply risky investment: a new, emerging market-based firm, with no history in the energy sector, pledging outsized returns from untapped offshore oil fields.

That so many astute moneymakers were willing to invest so heavily in such an unsure thing is testament both to greed – or at least, the desperate and never-ending hunt for yield – and to the efficacy of Batista’s sales patter.

Arthur Miller and Willy Loman would have been proud. 

 

 

 

 

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