Drum beat grows louder for OGX default
NEW YORK, Oct 4 (IFR) - Brazilian oil and gas group OGX has fired the starting shot on what may become Latin America's largest corporate debt restructuring, after publicly conceding it would miss a US$45 million interest payment on its 2022 bonds.
The process is sure to be protracted and complicated as debt-holders move to extract value from a company that may not have any value at all.
The market had already resigned itself to a default on the news this week that OGX would postpone payment on a debenture, which was effectively an inter-company loan used ultimately to transfer funds to meet the payment on the 2022 notes.
OGX debt-holders, thought to include heavy hitters such as Pimco, were expected to be asked to swap their debt for equity and inject extra cash to keep operations ticking over. According to Thomson Reuters' Emaxx, Pimco was a holder of the 8.375% 2022s as of March this year.
Rumours have run rife in the past few months as to how such investors are positioning their OGX holdings. Market speculation had them adding on dips in an effort to strengthen negotiating positions once default occurs and to lower the average entry price on the credit.
Prices on OGX 2022s and 2018s barely budged on Tuesday's announcement, closing at a wide bid offer spread of 15-18.
Michael Roche, an analyst at the Seaport Group, puts fair value in that range, basing his calculations on one of the few productive assets left in the company's portfolio, an onshore oilfield in the Parnaiba Basin.
Taking estimated production levels in that field and dividing that by the US$3.9 billion of senior bonds that comprise most of the debt on OGX's books, Roche arrived at a price of 17.5 cents.
"The debt market is valuing the only productive asset the company has," he said.
The arrival on Tuesday of the OSX III, a floating production, storage and offloading vessel, at OGX's Tubarao Martelo "Hammerhead" field raised hopes that the company may soon start producing offshore oil from the operation, potentially providing some upside for the bonds.
"If they can get the FPSO hooked up and get the oil flowing, the bonds will exhibit some positive price action," said Roche, who believed production levels of 10,000 barrels a day could put fair value of the debt back up at around 33.
However, such aspirations soon faded after a proven reserve report on Thursday fell far short of expectations, sending the bonds lower to 13-14.
With the clock ticking on the 30-day grace period before creditors can accelerate, OGX's ability to extract oil was seen as vital during debt negotiations.
Lower-than-expected reserves could possibly mean that Malaysian oil company Petronas may walk away from its agreement to buy a 40% stake in the field, taking away a vital source of funding.
"It further reduces the likelihood that Petronas will be part of a solution to restructure OGX prior to bankruptcy," JP Morgan analysts said.
FEW AND FAR BETWEEN
Finding more funding is essential if OGX is to remain operative and avoid bankruptcy, but financing options are few and far between.
Local newspaper Folha de Sao Paulo reported that OGX's owner Eike Batista will soon start approaching banks in New York about obtaining up to US$500 million in debtor-in-possession financing.
Observers remain sceptical about Batista's ability to raise money this way, given the rarity of DIP funding in Brazil. There is also the question of whether OGX could use its offshore oil concession as collateral.
"How do you secure a concession that is owned by Brazil's oil agency?" wrote an analyst. "I'm pretty sure you can't ... which is probably why the bonds are trading down at 13."
Observers do not discount the possibility that the company and its creditors will sign a standstill agreement to give them more time and perhaps avoid a bankruptcy proceeding that could prove lengthy and frustrating.
"It strikes me it would be a lose-lose situation if they went into bankruptcy," said Roche. "In that case, there would be forced selling."
It is thought bankruptcy proceedings would force regulators to make OGX relinquish its offshore licences, essentially leaving it with few, if any, assets.
"If they don't have a licence, they don't have the capability to generate any cashflow," said a banker. (Reporting by Paul Kilby; Editing by Matthew Davies)
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