RIO DE JANEIRO/SAO PAULO OSX Brasil SA (OSXB3.SA), the Brazilian shipbuilder controlled by former billionaire Eike Batista, is considering seeking court protection from creditors as early as Wednesday, three sources with direct knowledge of the plans told Reuters.
OSX would likely petition the same Rio de Janeiro court where Batista's oil producer OGX Petróleo e Gas Participações SA (OGXP3.SA) sought protection on October 30, said one source.
With the move, OSX will put 5.3 billion reais ($2.3 billion) of debt under court protection. The refinancing on Tuesday of a 461 million real ($201 million) loan to OSX by Caixa Econômica Federal and Banco Santander Brasil SA (SANB11.SA) for an additional 12 months will give OSX much-needed cash flow as it enters the proceedings, a second source said.
The situation follows more than a year during which Batista's Grupo EBX, a sprawling empire of energy, mining and logistics companies including OGX and OSX, collapsed under a mountain of debt after missing production targets.
Batista has sold off controlling stakes and major assets of three other companies to reduce his conglomerate's debt.
The decision to seek court protection from creditors gained support over the past couple of weeks. Insiders and close advisers to the company as well as Batista saw it as the only solution to avert liquidation, the third source noted. All of the sources declined to be identified because the plans are private.
A filing could put OSX's $500 million in dollar-denominated bonds due in March 2015 into default, investors said.
"Bankruptcy protection is a possibility that the company has considered, but there is no decision on whether we will use it," a spokeswoman for OSX in Rio de Janeiro said on Wednesday.
Shares of the company fell 12.5 percent on Wednesday, erasing some of Tuesday's 21 percent gain after Reuters reported the loan refinancing went through. OSX is down 94 percent this year.
The price on OSX's 9.25 percent secured bond gained 3 cents on the dollar to 84 cents from Tuesday.
CRISIS OF CONFIDENCE
The crisis in investor confidence in Batista's industrial empire pushed him off his perch as the world's seventh-richest man and led to a struggle between shareholders, banks and bondholders over remaining assets. Batista's unraveling has become a symbol of Brazil's economic woes after a decade-long boom that made it one of the world's hottest emerging economies.
Creditors of OSX have been especially worried that the interdependence between OSX and OGX would make the former more vulnerable during the latter's bankruptcy proceedings, one source said.
Like other companies in Batista's EBX Group, OSX's troubles stem from the failure of OGX to meet its ambitious oil production targets. After starting output at its first field in early 2012, OGX repeatedly missed goals despite reassuring investors that copious amounts of oil would soon flow.
After informing investors that firm orders for vessels reached about $7 billion about a year ago, the decline of OGX weighed down on the feasibility of OSX's order pipeline, the second source said. For most of this year, OSX has dismissed workers as orders plunged, and put some businesses on the block as losses and debt-servicing costs soared.
OSX is also one of OGX's biggest creditors. OGX owes OSX at least 2.45 billion reais, according to documents filed with the bankruptcy court.
Filing for bankruptcy protection could help OSX save its shipyard unit, part of which is ready to begin operations at the port in Açú, according to two sources. Açú operator LLX Logística SA LLXL3.SA said it was in advanced talks with OSX and its shipyard unit to renegotiate earlier contracts for the use of the port.
OSX hopes to operate a scaled-back version of what was originally planned as the Southern Hemisphere's largest shipyard, with advice from South Korea's Hyundai Heavy Industries Co (009540.KS). Hyundai owns about 10 percent of OSX.
In addition to building, repairing and modifying vessels, OSX hopes to sell or lease unused land and dock space at Açú to other marine construction and service companies seeking to capitalize on Brazil's offshore oil boom, the third source said.
Last week's filing by OGX aimed to restructure 11.2 billion reais in debt, making it the largest-ever corporate bankruptcy filing in Latin America.
($1 = 2.29 Brazilian reais)
(Additional reporting by Asher Levine and Brad Haynes in São Paulo; Editing by Lisa Von Ahn and Jeffrey Benkoe)