Bankruptcy in Brazil

Paula Dittrick, Special Correspondent – OGFJ

International investors are watching closely Brazilian oil company OGX Petróleo e Gás Participações SA, which filed for bankruptcy in a Rio de Janeiro court, and court documents disclose $5.11 billion total debt, of which $3.6 billion involves bonds in default.

US investors hold most of those bonds. OGX has asked its biggest bondholders, including Black Rock Inc. of Houston and Pacific Investment Management Company LLC of Newport Beach, Calif., to convert debt into equity.

The collapse of OGX comes among a series of financial problems for OGX founder and former billionaire Eike Fuhrken Batista, who was dropped from Forbes' billionaire list in September. In early 2011, Forbes had estimated Batista's worth at $30 billion.

OSX Brazil SA, Batista's shipbuilding company, filed for bankruptcy within a month of the OGX bankruptcy filing. OSX was set up to build oil platforms primarily for OGX.

Batista's conglomerate is known as the X Group. During 2011, Batista suggested he was on course to become the richest man in the world. He blames OGX's problems on disappointing results in some offshore oil fields off Brazil.

OGX delisted from the BM&F Bovespa stock exchange on Oct. 30. The delisting came within hours after OGX filed for bankruptcy. The oil company went public and was listed on Bovespa starting in 2008.

As late as 2012, Batista still touted estimates of more than 10 billion barrels of oil equivalent in pre-salt resources in Brazil's Atlantic Ocean offshore coastal São Paulo, but many of OGX's wells came up dry and failed to fulfill those estimates.

The pre-salt promise also has proved costly for other companies. Brazilian state oil company Petrobras has divested assets outside Brazil to help reduce debt that it incurred by investing in complex drilling technology and services to tap into the pre-salt oil resources. Consequently, Petrobras reduced its international operations from a presence in 23 countries during 2012 to 17 countries as of November 2013.

The International Energy Agency remains optimistic, saying Brazil eventually might become the sixth-largest oil producer worldwide. EIA's World Energy Outlook report suggests Brazil could produce 6 million b/d of oil by 2035, up from its current 2 million b/d.

OGX requests investors convert debt into equity

Christopher Kiplok, partner in the restructuring group at the law firm of Hughes, Hubbard & Reed, said, "OGX will certainly require deft negotiating with creditors….The case will be a huge test for Brazil's [bankruptcy] regime, which is less than a decade old."

Brazil drastically reformed its bankruptcy code, Kiplok said, calling the OGX filing "a big case for Latin America. It's one to watch carefully" for international investors.

Although Kiplok is not involved with the OGX case, he has strategic and legal experience with international bankruptcy cases. He served as principal deputy to the trustee in the liquidation of both Lehman Brothers and MF Global.

During the Lehman case, Kiplok negotiated resolution of $100 billion in claims and led insolvency strategy in 16 different jurisdictions worldwide.

Kiplok said the OGX $5.1 billion bankruptcy case represents the biggest default in Brazil's corporate history.

"The unprecedented size adds a greater light" to the OGX bankruptcy, Kiplok said, adding that he believes "the best investment bankers and lawyers in the world" will be involved in resolving the case.

Kiplok declined to comment on OGX's request for Black Rock and PIMCO to convert debt into OGX equity. He noted the bankruptcy was not a surprise to the international investment community, and he expects "the creditors are talking to each other."

It's likely that negotiators in conference rooms will be able to resolve most issues outside the bankruptcy courtroom, Kiplok said, adding that litigation only delays what he calls "economic decisions in an intensive results-oriented" process that will involve complex risk models calculated by the creditors involved.

OGX has said it wants to change its name to Oleo e Gas Brasil SA and wants to move its headquarters from the historic Serrador building in the center of Rio de Janeiro, where Batista's companies moved in 2011 when he was still building his conglomerate.

Kiplok said any name change, if permitted, is unlikely to have any substantial effect upon the OGX bankruptcy outcome or change the value of its assets.

Itaú Unibanco Holding SA, a bank that is Brazil's largest non-governmental lender, appears undaunted by the X Group bankruptcy filings, saying pending negotiations and court proceedings are unlikely to significantly affect Itaú's earnings.

"We've been reducing our risk in the X Group," Itaú CEO Roberto Setubal told journalists and analysts recently. "I don't see a scenario where there's a relevant impact on the bank's earnings."

Itaú's loans to the X Group's companies fall outside bankruptcy proceedings because the bank loaned money only to selected assets, he said. For instance, three OSX oil platforms set up as separate corporations are outside the bankruptcy proceedings.

The bank's investment division, Itaú BBA, suggests the platforms themselves serve as credit guarantees and that Itaú is "adequately provisioned" against possible X Group bankruptcy fallout.

"The X Group has more assets than liabilities," Setubal said. "I'm not too worried."