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Eike Batista | Sink or Swim

OSX - Sociedade (1)

Tracking news on what looks like the impending hard landing of the EBX group.

Source: EXAME.

Translation: C. Brayton

The oil and gas company OGX has been listed as one of the companies most likely to declare bankruptcy in the world, according to the U.S. consultancy  Kamakura Corporation; its shares fell to R$ 0.39 in Wednesday’s session, and Eike’s personal fortune, valued at US$ 30 billion in the past, is now worth less than US$ 3 billion, according to a ranking by Bloomberg. …

… The new OGX is unlikely to be able to support payments on $3.63 billion of bonds, the source said. OGX debt due in 2018 and 2022 is already trading at less than 20 percent of face value, a sign that investors expect a default.

In the face of so much bad news, there are those who say Eike has reached bottom.  Others, however, say that many things that can still occur and that the situation could even still worsen.

For instance, in the same issue of EXAME, on OGX, the natural gas logistics subsidiary, currently under construction:

 The OSX facility was planned to be “the  largest shipyard in the  Americas,” with capacity to  work on 14 platforms at a given time during the first stage of development, a feat requiring R$ 4.8 billion in investments. Without petroleum from its sister company OGX [–  drilling came up empty –],  orders have dried up. The shipyard, with 2.5 million square meters of usable land, docks fully equipped and warehouses built, remains unused.

OSX has tried to sell off the facility but no one has proven willing to pay the expected preliminary price. “The project, as planned, is no longer viable. It has no orders with which to pay the bills,” said a source in the maritime industry. …

… The new OGX is unlikely to be able to support payments on $3.63 billion of bonds, the source said. OGX debt due in 2018 and 2022 is already trading at less than 20 percent of face value, a sign that investors expect a default.

OGX shares have  recovered some of their value late this week with the announcement that Batista is stepping down as chairman of the board.

I wish someone would point me to a neat, clean infographic on the group and its subsidiaries, such as LLX, MMX [–suspended iron ore mining operations on Bolivian border –], MPX and others. The Chicago Tribune has a piece on the case this morning.

Batista will also cut his debt to Abu Dhabi sovereign-wealth fund Mubadala , EBX’s biggest creditor, reducing it by more than 25 percent to between $1.6 billion and $1.7 billion, the source said.

In a survey by EXAME,  market talking heads chime in:

EXAME spoke with analysts and petroleum sector experts to understand factors that might contribute to the collapse of the X group and its founder.  These factors are as follows:

Capital infusion of US$ 1 billion may not happen

OGX is the flagship of the EBX group and also the source of most of its problems.  In October of last year, in a bid to restore the confidence of the market, Eike agreed to buy US$ 1 billion worth of shares in OGX at R$ 6.30. The deal was supposed to close by April 2014, but the outstanding question is whether Eike will have the assets to inject into the company as promised.

“It is impossible to know. EBX is a private company, and no one knows its true financial condition. The most realistic way to approach this situation is to assume that the bankruptcy of OGX is the most likely scenario, although the most likely is not always what actually occurs,” says Adriano Pires, director of the Centro Brasileiro de Infraestrutura (CBIE).

Another scenario raised by analysts is that OGX will find it hard to find partners sincerely interested in investing in the company.  There are rumors that Eike is willing to give up control of the oil and gas company into order to try to save it.   “FInding a buyer, however, is a difficult task.” So difficult that to date no buyer has been found.  It is not impossible, but it maybe that selling off partial blocs, as in the Petronas case, would be more viable than finding a partner strictly speaking,” said Luiz Caetano of Planner Corretora.

Credibility could collapse

For Raphael Cordeiro of the Inva Capital brokerage house, the worst thing that could happen is the loss of credibility with the market.    “It is not lack of money that causes a company to fail, it is the lack of credibility, and Eike’s is badly damaged. I believe that OGX will will never return to what it was, but there is a chance the company can restructure its debt,” the analyst said.

OGX debts greater than predicted

Another rumor that worries the markets is the true value of OGX’s debt.  A report by the Covenant Review concludes that the debts reported by OGX are greater than the market is being told.  Its market value at the end of 2012 was US$ 4.58 billion. The U.S. consultancy says, however, that this figure could be 39% higher, reaching US$ 6.38 billion.

Short-term debt is also cause for concern, such as the US$ 449 million that OGX must pay OSX immediately for the interruption in the construction of platforms that were to be used in wells where production has been suspended.  In a Material Event announcement, the company said that the payment of this sum is not harmful to its plans, given that the sumwill be repaid with funds that OGX will receive from the sale of 40% of exploratory blocs BM-C-39 and BM-C-40.

Unfavorable economic scenario

According to Adriano Pires, the current economic climate in Brasil is not attractive to foreign investors, which might also make foreign companies dubious about investing in Eike’s companies.

“The group faces a perfect storm. If the situation of Brasil were better, it would not be so difficult to attract investors,” the expert said. In the view of Pires, OGX has all the prerequisites fora a bankruptcy, “but I still see a weak light at the end of the tunnel,” he said. It remains up to Eike to make that light shine brighter, clarifying the situation.

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Source: IstoÉ Dinheiro