UPDATE 2-Brazil's Lupatech misses debt payment in new sign of strain

Wed Apr 10, 2013 7:16pm EDT

* Lupatech pledges to inform markets of further events

* Company had already signaled payment delays on loans

By Guillermo Parra-Bernal

SAO PAULO, April 10 (Reuters) - Brazilian oil equipment company Lupatech SA failed to pay interest on $275 million of bonds in the latest sign of financial and operational strains facing companies in the once-thriving sector.

The Caxias do Sul, Brazil-based company was scheduled to deposit about $6.789 million worth of coupon payments in bondholder accounts on Wednesday, Chief Financial Officer Thiago Piovesan said in a securities filing. The 9.875 percent, perpetual bond was sold by the company's Lupatech Finance Ltd unit in June 2007.

The decision to halt payments comes even after Lupatech received government support to weather a crisis in the country's oil services sector. Difficulties caused by fuel subsidies, project delays and soaring costs at state-run oil company PetrĂ³leo Brasileiro SA have spread to the wider economy, undermining suppliers like Lupatech and raising credit risks.

"The company will keep investors fully informed about potential new events," Piovesan said in the filing. The company hired Bank of America Merrill Lynch to help advise on a restructuring of its finances, he added.

Worries over Lupatech may also hurt other players in the industry, which the government has for years sought to foster. With an eye on giant new offshore oil reserves, President Dilma Rousseff wants to keep as much as possible of the hundreds of billions of dollars budgeted for ships, rigs and pipelines at home to bolster economic development.

Lupatech, the country's biggest supplier of industrial valves and anchor cables, counted on an expected flow of orders to capture a slice of the boom created by Petrobras's $237 billion, five-year investment program. Instead, the firm has grappled with insolvency as Petrobras orders have been slow to materialize and skittish credit markets restricted access to fresh funding.

Swept up in its ambitions, Petrobras agreed to build five refineries and a fleet of more than 300 ships, sought new oil discoveries at record sea depths and invested in biofuels. After a couple of years, an overstretched Petrobras fell behind on its goals and announced more than $9 billion in cost cuts this year, sapping revenue for Lupatech and peers.

Shares of Lupatech have shed more than 91 percent of their value since the end of 2010 - when investors began to perceive order delays and the company's need for shareholders' support. The stock advanced 1.4 percent to 1.42 reais on Wednesday.

In the same period, the yield on Lupatech's perpetual bond have almost quadrupled to 37 percent on Wednesday from about 10 percent as creditors jumped ship in anticipation of a default.

INDUSTRIAL POLICY

The non-payment comes as a shock for investors, because the company is majority-owned by state-run entities. State development bank BNDES is Lupatech's largest shareholder with a 31.25 percent stake, followed by Petros, the pension fund owned by Petrobras' workers, with 24.6 percent. Private-equity firm GP Investments Ltd has a 15.9 percent stake.

Calls to BNDES, Petros and GP Investments seeking comments were not answered after working hours.

Moody's Investors Service said on March 4 that Lupatech's delay of interest payments on local debt notes and principal repayment on some loans would not have an immediate impact on the company's "Caa2" ratings.

Lupatech lost a net 151 million reais ($77 million) in the fourth quarter of last year, compared with 62 million reais in the third quarter, reflecting weak operations and number of large write-offs, mostly to related to past acquisitions.

Net debt surged to 1.2 times shareholders' equity in the quarter, compared with less than 1 time in the prior three months.

The company's struggles and those of its peers are shining a harsh light on Brazilian industrial policy that puts fledgling local suppliers at the heart of plans to double oil output and become one of the world's top four oil producers by 2020.

Dependent on Petrobras for much of their business, project delays have played a part in forcing some firms such as construction company GDK SA to request bankruptcy protection. A review of this sort led to the bankruptcy of another supplier, Tenance Engenharia, which got 90 percent of its revenue from Petrobras, a former Tenance executive told Reuters.

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