Bondholders of Brazil's OGX urged to act now
July 19 (IFR) - Holders of billions of dollars of bonds from OGX are being urged by lawyers to quickly engage with the troubled Brazilian oil and gas company, which could be headed toward the biggest corporate debt restructuring in Latin America ever.
As tycoon Eike Batista's vast business empire crumbles, top law firms with long experience in Latin American restructuring are trying to organise bondholders and rescue some value for them if, as many fear, OGX should default.
"They don't have many options," said Omar Zeolla, a credit analyst at Oppenheimer & Co. "They could force to bring the company to the table, but a restructuring doesn't solve the whole problem," he said.
Many see debt restructuring as inevitable at OGX, the former crown jewel in Batista's X empire, which is now haemorrhaging cash while struggling to achieve the promised levels of oil production at its offshore fields.
This week the company's bonds hit new lows, with its 2018s and 2022s reaching mid-market levels of 15.20 and 14.30 on Wednesday - and that has only intensified fears about what can be retrieved from the stumbling company if a default occurs.
Law firm Cleary Gottlieb Steen & Hamilton organised a call with a number of OGX creditors earlier this month, and this week was preparing follow-ups with a small group of investors that own a significant amount of the company's debt.
According to documents seen by IFR, the lawyers said creditors should consider an out-of court deal to recoup some money from the US$3.6bn in OGX bonds that are outstanding.
OGX has already sold a 40% stake in one offshore field to Malaysia's Petronas, and has made a US$449m cash payment to sister company OSX.
Market chatter that Batista is looking for potential buyers of OGX's other offshore oil fields has left the impression that the company is being drained of assets - which would obviously be to the detriment of bondholders.
Because local private and state-owned banks also have significant exposure to Batista's debt, however, some say that OGX's foreign bondholders - outsiders faced with an unfamiliar legal system that is not necessarily creditor-friendly - could be at a severe disadvantage.
"You have local creditors and large banks highly exposed and they are doing everything they can to have access to the best issuer or guarantees, and bondholders are just left waiting to see how the story unfolds," said a Brazil-based credit analyst.
OGX investors should take into account the broader ownership structure and liabilities at the holding company EBX, said Morgan Stanley credit analyst Jose Kliksberg in a recent report.
"The solution to this situation does not lie only at OGX and its balance sheet, but also within the largest Brazilian banks involved at EBX and its subsidiaries," he wrote.
Outstanding debt at Batista's X companies stands at around US$10bn, not including undisclosed liabilities at the holding level, according to a presentation made to bondholders by FTI Consulting, a business advisory firm.
In its own presentation to bondholders, Cleary urged them to engage OGX and encourage it to "preserve cash, maintain liquidity and find new funding".
And while local insolvency law tends to be debtor friendly, Cleary suggests that OGX's high profile and sheer debt size - as well as the broader implications for corporate Brazil - will work to the advantage of bondholders.
Without a positive response from the company, the law firm said, investors should consider filing suit in Brazil and abroad.
In Brazil, at least, that may prove to be a tricky undertaking. So-called substantive consolidation used in US bankruptcy proceedings - the pooling of assets and liabilities of related debtors - is not applicable under Brazilian law, which views each subsidiary as a separate entity, according to Cleary.
This means that OGX bondholders may not be able to gain access to the assets of other companies in Batista's X group.
Under a judicial reorganization in Brazil - something akin to a Chapter 11 filing in the United States - creditors may have to face either a deal that favours debtors or accept liquidation, which in OGX's case likely would wipe out any remaining value.
A voluntary debt exchange may also be an option. Yet while this may help OGX reduce its cash drain, it may also prompt regulators to view the company as insolvent, which would trigger the termination of vital concession, according to one analyst. Nor does it solve the problem of how OGX will raise the funds to remain in operation long term.
"They are not generating any cash," said Oppenheimer's Zeolla. "They need more capital to keep the company going."
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