RIO DE JANEIRO OGX Petróleo e Gas Participações SA, the Brazilian oil company controlled by former billionaire Eike Batista, sought court protection from creditors on Wednesday in Latin America's largest-ever corporate bankruptcy filing.
The bankruptcy protection request, filed in a Rio de Janeiro court, came after OGX failed to reach an agreement with creditors to renegotiate part of its $5.1 billion debt load. The request marks another chapter in the unraveling of Batista's once high-flying industrial empire, which he has been dismantling in recent months after disappointing output from offshore OGX wells set off a crisis of investor confidence.
If the court approves the request, OGX will have 60 days to come up with a restructuring plan. OGX creditors, which include the California-based bond fund Pacific Investment Management Co (PIMCO), and U.S.-based investment fund BlackRock Inc, will then have 30 days to endorse or reject the plan.
It is too early to know how long a restructuring could take, but in Brazil's slow-moving judicial system, some bankruptcy proceedings take years. The company's fate could depend on whether OGX, even as it restructures, honors contractual obligations with the government in the oil fields it operates.
An OGX bankruptcy is unlikely to have a significant effect on Brazil's economy. The company is barely out of its start-up phase and produces almost no crude oil, and most of its debt is held by foreign bondholders.
Still, Batista's decline has become a symbol of Brazil's own economic woes. After a decade-long boom in which investors poured cash into Brazil and Batista's enterprises, Latin America's largest economy has been in a rut for three years.
And the fate of sister company OSX Brasil depends almost entirely on OGX, whose market value has plummeted by nearly $45 billion since October 2010. Batista created OSX, which had to scale back efforts to construct the largest shipyard in the Southern Hemisphere, to build and lease oil production and service vessels to OGX.
OGX's decision to seek protection from creditors came as no surprise. After missing a $44.5 million interest payment owed to bondholders on October 1, OGX scrambled to restructure its debt before the end of a 30-day grace period or be declared in default on $3.6 billion in bonds.
The process was rocky from the outset, and OGX called off the talks with creditors on Tuesday, leaving a bankruptcy filing as the only viable option to buy it more time.
"We knew it was coming. Even the shoeshine boy told us about this," said Dan Fuss, vice chairman and senior portfolio manager at Loomis Sayles, which oversees $193.5 billion in assets under management, including OGX bonds.
OGX declined to comment.
In its bankruptcy filing, OGX lawyers said the company's 10 billion real (US$4.6 billion) exploration campaign was a high-risk venture and that these risks were clear to investors from the start.
Lower output from its first field and the cancellation of two others was bad geological luck, the lawyers wrote.
"Once we restructure our debt and make our capital structure adequate, OGX will have a prosperous future, able to generate wealth for its shareholders, workers, creditors and for Brazilian society," the filing said.
A renowned dealmaker who once boasted he would become the world's richest man, 56-year-old Batista has seen his personal fortune reduced by over $30 billion in the last 18 months as investors punished the share price of his listed companies.
The downward spiral forced Batista to start breaking up his Grupo EBX conglomerate, which also included a port operator, mining and energy interests, and an entertainment company.
RACING TO PUMP OIL
Brazil's 8-year-old bankruptcy law is similar to U.S. Chapter 11 proceedings, and gives OGX a chance to reduce its liabilities and emerge as a going concern. Bondholders will play a key role in the process, though in recent cases - such as those of power companies Celpa SA and Grupo Rede Energia SA - some creditors complained that judges privileged the claims of state-owned banks over theirs.
Indeed, bankruptcy cases have not always moved smoothly through Brazilian courts and some judges have been sympathetic to pressure from different stakeholder groups like employees, pensioners and shareholders, at times putting their interests above those of creditors, said Paulo Rabello de Castro, head of SR Rating, a Brazilian credit rating agency.
Investors worldwide will be watching as the OGX proceedings unfold. If bondholders feel they are not treated fairly in the restructuring process, foreign investors may think twice before investing in other Brazilian companies, analysts say.
PIMCO and Blackrock declined to comment. PIMCO held nearly $387 million worth of OGX bonds in registered funds at the end of June, according to the latest data provided to Lipper.
OGX is racing to start output at its offshore oil field Tubarão Martelo field by the end of November, its best hope for a source of revenue. Failure to get Tubarão Martelo producing will make it harder to find an investor to buy all or part of the field and could lead to the breaking of contractual obligations to Brazil's oil regulator, the ANP.
While the ANP has said a bankruptcy filing would not automatically cause OGX to lose its production leases and exploration rights, it stressed that any failure to meet the conditions of these contracts would result in their loss. That would strip OGX of any chance of generating future revenue.
The company needs about $250 million of debt or equity financing to keep operating through April 2014, it said in a recent presentation to bondholders. Without new financing, OGX said it would run out of cash in the last week of December.
During talks, OGX and the bondholders discussed a potential $150 million credit line aimed at funding the company's exploration campaign for a few more months. But there was disagreement over Batista's plan to have bondholders convert debt into equity as well as the terms of his potential departure from the company, sources told Reuters last week.
Bankruptcy judge Gilberto Faria Matos will have to decide if output from Tubarão Martelo and other offshore and onshore areas are sufficient to keep the company operational and allow for some repayment to creditors.
The main sources of revenue for a future OGX would be its share of $17.2 billion of offshore oil and natural gas revenue from its Tubarão Martelo field and BS-4 block, the company said in the bankruptcy filing.
"I think there is some value in OGX's offshore assets," said an oil executive who has seen geological data about OGX's prospects and fields. "If the price is right I think someone may well buy them and that they could produce pretty well."
FROM RECORD IPO TO BANKRUPTCY
OGX was founded in 2007 and raised $1.3 billion from private investors to buy oil concessions in November of the same year, a month after state-run Petroleo Brasileiro SA, or Petrobras, announced the discovery of a giant offshore oil province south of Rio de Janeiro.
Seven months later, Batista raised 6.7 billion reais ($4.1 billion) for OGX in an initial public offering in what was at the time the biggest IPO in Brazilian history.
A year after that he was drilling wells. A period of rapid success in finding oil led OGX to briefly outstrip Petrobras as the most successful explorer in Brazil by strikes registered.
OGX pumped its first oil in January 2012, but by mid-year it became clear that the field would not produce near expectations and the company's stock began a drawn-out decline.
In the last year alone, OGX's share price has plunged about 95 percent, making it the worst performer on the BM&FBovespa Stock Exchange's main index.
The case is docket number 0377620-56.2013.8.19.0001, in the 4th Section of the Corporate Division of the Justice Tribunal of Rio de Janeiro State.