Factbox: OSX's path through Brazil's bankruptcy process

Mon Nov 11, 2013 3:04pm EST

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(Reuters) - Brazilian shipbuilder OSX Brasil filed for bankruptcy on Monday, a source told Reuters, making it the second company controlled by former billionaire Eike Batista to seek court protection from creditors.

OSX's filing comes less than two weeks after sister company OGX Petróleo e Gas Participações entered into Brazil's relatively new bankruptcy process.

Brazil's bankruptcy law was enacted in 2005 to correct inefficiencies in the previous system, which was based on postponing debt payments rather than saving a company through renegotiation or restructuring. Creditors, who rarely saw repayment following a bankruptcy filing, would charge exorbitant interest rates in response.

Inspired by the U.S. bankruptcy code's Chapter 11 procedure, creditors now play a key role in Brazil's process, which is designed to increase recovery rates, reduce credit risk, and bring down the cost of financing.

Some of the largest Brazilian companies to have filed for bankruptcy protection under the new law include airlines Viação Aérea São Paulo SA, known as Vasp; Viação Aérea Rio-Grandense SA, or Varig; pulp producer Eucatex SA, and electricity holding company Grupo Rede Energia SA.

While some companies, such as Eucatex, have successfully emerged from the process, others such as Vasp were liquidated. Others, such as Grupo Rede, were sold off.

The following is a look at the process OSX and OGX will undergo now that it has requested legal intervention, based on a report from Goldman Sachs Group analysts led by Felipe Mattar:

STEP 1

A local judge, as opposed to a federal judge in U.S. bankruptcy cases, is assigned to OSX's case and appoints a legal manager for the company, who could be either an independent individual or a representative from a company with recognized expertise. The legal manager is given authority to make executive decisions such as replacing the company's management team or spinning off subsidiaries, provided those actions are called for in the company's recovery plan, which will be defined in the next stage.

Under U.S. law a trustee is appointed to operate the business only if the court finds the company's management team negligent or unfit.

STEP 2

The company's management must present a detailed recovery plan within 60 days of the filing, provide an independent estimate of its existing assets, and outline concrete steps to be taken to restore financial viability, which will likely include a proposal for debt renegotiation. Unlike U.S. procedure, which offers 120 days and the option to extend up to 18 months, this period cannot be extended in Brazil. Only the company may present a plan in Brazil, unlike in the United States where creditors are given the opportunity to do so if no plan is submitted within 180 days.

Of 10 high-profile Brazilian bankruptcy cases examined by Goldman Sachs, the average so-called haircut, or losses in the principal of the debt, negotiated with debt holders amounted to 49.7 percent.

STEP 3

OSX's creditors, on an individual basis, have 30 days from the presentation of the recovery plan to declare themselves in favor or opposed to the recovery plan.

STEP 4

If the plan is not unanimously approved, the company's creditors have an additional 60 days to schedule a committee meeting to hold discussions, adjust the plan if need be, and vote on it. Any adjustment to the plan must be approved by the company's controlling shareholders. If no consensus is reached OSX would automatically go into bankruptcy liquidation.

STEP 5

If the recovery plan is approved, OSX and its legal manager must implement it within a maximum of two years from the date of the bankruptcy protection filing. Should the company fail to implement the plan the company could be moved into bankruptcy liquidation by the court, depending on the terms approved by the creditors' committee.

WHO GETS WHAT

Should OSX be liquidated, a legal manager would be appointed to sell the company's remaining assets and pay creditors in the following order: employee and labor liabilities, creditors with asset-backed guarantees, tax and fiscal liabilities, creditors with "special privileges" such as those owed rental payments, creditors with "general privileges" such as lawyers hired for the bankruptcy process, non-asset-backed creditors, and subordinated creditors.

This differs from U.S. procedure, which puts labor claims after other creditors, and where labor is often the first constituency to take a haircut.

OSX's shareholders would only receive payment if the sale of assets was enough to fully repay those creditors listed above.

(Reporting by Asher Levine and Nicholas Brown; Editing by Todd Benson and Leslie Gevirtz)

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