June 28 (IFR) - Time appears to be running short for Brazilian oil and gas entity OGX, whose bonds have plunged to distressed levels as the market apparently prices in a real risk of default.
OGX is ploughing through its cash, and with broad social unrest rocking the country, the idea of a government bailout for billionaire owner Eike Batista is politically unpalatable.
Many in the market now fear that the credit may have little recovery value if a default does occur. Before rebounding to 31.25-32.75 in a broader market rally, OGX 2018s fell as low as 26.00 this week.
“Nothing has traded at this level before without something happening,” one banker said.
While agencies and some analysts have calculated recovery values on OGX bonds in the 50s, Michael Roche of The Seaport Group said market prices indicate less than half that.
Assuming no cash left over, shareholders wiped out and a secondary trading level of 30 on its debt, Roche calculates a market cap of US$1.45bn for OGX’s US$4.85bn in outstanding debt, which includes US$2.6bn in outstanding 2018s, US$1.1bn in 2022s and some bank debt.
By dividing that market cap by the US$6.582bn in recoverable assets stated in OGX’s first-quarter report, Roche arrives at a recovery value of 22 cents on the dollar.
“There is a big difference between what analysts are saying and what the bond (is saying),” Roche said. “It makes for a difficult short.”
Even distressed buyers are staying well clear of the credit, with few assets of value seen beside offshore drilling rights and OGX’s onshore gas business.
“I don’t think there is any asset value except for the gas business,” said one analyst. “Distressed investors were sniffing around in the 50s and 60s, but the volume of calls has dropped. Everyone is waiting.”
Some believe OGX still has options, including a deferral of capital expenditures, selling more stakes in its fields, monetizing its onshore gas business, getting a cash infusion from the sale of other assets under the Batista umbrella or even restructuring its debt.
But few if any of these are viable long-term fixes for a high-risk capital-intensive business that is haemorrhaging money.
Batista granted the company a US$1bn put option to pay R$6.30 per share. He exercised a similar put at sister entity OSX, but the fact that he paid some 30 times over the market price this week smacked of desperation for some analysts.
Some believe Batista no longer has the financial clout to do the same for OGX. Indeed, Fitch cited uncertainty over his willingness to honour the put as reason for downgrading OGX to CCC from B- earlier in June.
“It is a question of time as to when it runs out of cash,” said one Brazil-based analyst. “Six months ago we trusted that Batista was serious... and that he would inject more cash and live up to the put option.”
Petronas provided some cushion in May when the Malaysian state-owned oil producer agreed to pay US$850m for stakes in OGX’s Tubarao Martelo offshore blocks.
But the cash promised from Petronas is subject to performance triggers, and OGX will not see all the money upfront in any case.
Much now depends on whether the Martelo field comes online in the fourth quarter - and poor hit rates in the past don’t inspire much confidence among investors, many of whom think Batista has taken an all-or-nothing bet.
“We are not owning [this credit] given there is much uncertainty with what will happen in that field and that has put all his eggs in that basket,” said Ray Zucaro, a portfolio manager at SW Asset Management.
“If production is poor as in other OGX wells, I don’t think its capital structure is sustainable.”
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