(Updates with details of filing in second paragraph.)
Oct. 30 (Bloomberg) -- 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 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. 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.”
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.
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, Lazard Ltd. 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.
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.”
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.
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.
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. 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.
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.”
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.”
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 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.
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.
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
--With assistance from Peter Millard in Rio de Janeiro and Cristiane Lucchesi and Francisco Marcelino in Sao Paulo. Editors: Robin Saponar, James Attwood