It has the feeling of the beginning of Eike Batista’s final fall from grace. Debt-ridden oil company OGX Petróleo e Gás Participações S.A. (OGX), the flagship of the Brazilian billionaire’s EBX commodities group, is on the verge of filing for bankruptcy following the failure of debt restructuring talks with holders of $3.6 billion of its bonds. Batista himself, once Brazil’s richest man — a title he held until less than two years ago — and whose biggest dream was to be the world’s richest person, appears to have disappeared off the face of the earth.
A deal with bondholders wouldn’t necessarily have averted what will be the largest corporate default in the region to date, but it would have simplified the now-expected court-supervised reorganization. OGX needs about $250 million of additional debt or equity financing through April 2014 to keep operating, the company said in a presentation to bondholders during the negotiations. The oil firm expects to run out of cash during the last week of December. Some reports suggest it could happen even sooner.
OGX’s own dreams of competing someday with state-run Petrobras — which is suffering debt problems of its own — have vanished. The company is said to be in talks to sell its stake in eight natural gas fields, although the head of Brazil’s petroleum regulator, the ANP, recently declared that OGX could keep its oil exploration blocks even if it filed for bankruptcy protection.
The conglomerate EBX Group was once valued at $60 billion. Its downfall has been relentless — largely due to the collapse of OGX. In the good days, Batista raised plenty of cash in both equity and debt markets promising to tap vastly into Brazil’s oil and gas fields and by assuring fat returns. That leverage has proved to be a too heavy burden to bear. OGX has an enterprise value (market capitalization plus debt minus cash) of $2.72 billion in a “base case operating model”, the company says. That is seven-times its market value of $357 million.
The decision whether and when to file for bankruptcy comes as a 30-day grace period for OGX to pay $44.5 million in interest to investors fast approaches its October 30 end date. The company has called an Extraordinary General Meeting for November 1.
OGX also faces a $100 million bond interest payment in December. Even if that payment isn’t met, under Brazilian law, a company that files for bankruptcy protection has up to 60 days to present a restructuring plan to creditors and the court. A bankruptcy on this scale will be a test to Brazil’s eight-year-old bankruptcy law and the level of protection it gives to creditors.
Some of OGX’s investors, including big asset managers such as BlackRock and Pacific Investment Management Co. (Pimco), would just like to walk away. The collapse of the debt restructuring talks were a rejection of Batista’s proposal to convert bondholders debt into equity, diluting his own stake. There decreasingly looks like much left to dilute.