* Banks seen leading any potential debt renegotiation at EBX
* Batista’s fortune declined over $20 bln in the past year
By Guillermo Parra-Bernal
SAO PAULO, July 17 (Reuters) – The banks that financed the
rise of billionaire Eike Batista’s Grupo EBX are leading the
struggling group’s debt refinancing efforts and should be able
to limit their potential losses. Bondholders, by contrast, could
be left with very little.
Some of Brazil’s biggest banks are refinancing maturing debt
and stretching out debt repayments for the cash-strapped mining,
logistics and energy conglomerate, a source with direct
knowledge of the situation told Reuters. They have also been
repaid some of the debt with proceeds from asset sales.
They are getting more collateral in the form of assets and
additional stock, though they are not conceding any reduction in
principal or interest on their loans, the source said.
The pressure exerted by state and private-sector banks on
EBX will enable them to virtually eliminate any significant loss
on their exposure to the struggling group, analysts and lawyers
said. Analysts estimate the exposure to be between 15 billion
reais ($6.7 billion) and 25 billion reais ($11.2 billion).
But bondholders including Pacific Investment Management Co.,
the world’s largest bond fund company, could face hefty losses
on their investments with Batista, who less than two years ago
had the world’s seventh-largest fortune, according to Thomson
Reuters data.
As Batista sells assets in his struggle to save as much of
his corporate empire as he can, he is prioritizing payments on
billions of reais in secured bank loans over other types of
debt, lawyers said.
That is already largely reflected in prices of bonds in
companies controlled by his group. Bonds of OGX Petr ‘leo e Gas
Participa es SA, Batista’s debt-ridden oil company,
are trading at about 16 percent of their face value.
“EBX and some of its six publicly listed entities and
private ventures are going through an orderly liquidation likely
driven by its largest banks, essentially to pay back senior bank
lenders,” Morgan Stanley & Co’s credit trading desk analysts,
led by Jos (c) Kliksberg, wrote in a recent note.
EBX said in an e-mailed statement to Reuters that it
recently ended a debt restructuring, without detailing whether
it was with banks or other creditors. It did not respond to a
question about whether the plan favored banks over bondholders.
OGX has no plans to restructure its debt, a spokeswoman said in
an e-mail.
Batista declined to be interviewed for this story.
In recent weeks, EBX-controlled OGX, shipbuilder OSX Brasil
SA and logistics company LLX Log -stica SA
have partially or fully repaid loans with Ita ? Unibanco Holding
SA and Banco Bradesco SA, fanning
bondholder concerns that the commitments are coming at their
expense.
Ita ? and Bradesco declined to comment on their EBX exposure.
‘BANKS BARK LOUDER’
Some in the market saw OGX’s decision in June to pay OSX
$449 million in compensation for the cancellation of some orders
as a way to protect its local creditors, such as banks, while
weakening OGX’s ability to pay holders of its global bonds, said
David Epstein, a managing director at research firm CRT Capital
LLC.
Banks are moving ahead of other OSX creditors before
attempts are made to reclaim possession of ships. In the event
that OSX, which Batista created to build and lease ships to OGX,
becomes insolvent, OGX could be forced to pay for the cost of
building the ships, according to the prospectus for OSX’s global
bond sold in March last year.
“In Brazil, banks bark louder than other creditors do and
they seem to bite harder,” said a manager at a New York-based
fund, which owns bonds in some EBX companies and declined to be
named due to the sensitivity of the issue. “OGX is trading at
levels that indicate a future (legal) claim.”
Last week New York-based law firms Cleary Gottlieb Steen &
Hamilton LLP and Bingham McCutchen LLP met with OGX and OSX
bondholders to discuss the challenges that Brazil’s insolvency
law could pose in a default. Moody’s Investors Service on
Tuesday said current rules make recoveries in Brazil rather
lengthy and tougher for some creditors.
Documents sent by the lawyers to some investors expressed
concern that neither EBX nor any of its companies “engaged in
discussions in spite of a series of dramatic announcements.”
“Many bondholders are asking where is OGX’s debt
restructuring proposal,” said Revisson Bonfim, a fixed-income
analyst with Esp -rito Santo Investment Bank.
Pimco amassed a position in OGX bonds north of $450 million
between October last year, when prices of the bond were near 88
percent of face value, and April, according to Thomson Reuters
data. Pimco did not respond to repeated requests for comment.
BANK EXPOSURE
State development bank BNDES is EBX’s largest
creditor with 10.4 billion reais in commitments. A spokesman for
Rio de Janeiro-based BNDES declined to comment.
Analysts estimate the combined loan exposure of Brazil’s top
four private-sector banks to EBX at about 5.1 billion reais. But
that may be conservative, given poor disclosure and a lack of
information on how much of that exposure is collateralized.
In the case of Brazil’s private-sector banks, exposure to
EBX is “limited,” with potential credit-related losses weighing
down earnings for a quarter or two in the worst-case scenario,
UBS Securities strategist Philip Finch said in a recent note.
Finch said “most of the loans and financing are backed by
guarantees, both cash as well as stocks of X companies,” a
reference to the X in the name of all Batista companies, which
is supposed to symbolize the multiplication of wealth. “We
recognize the recent devaluation of shares in EBX companies, but
still, banks could be able to execute the cash guarantees.”
OGX shares are down 88 percent this year through Tuesday,
while those of OSX slumped 90 percent in the same period. LLX is
down 69 percent.
While a default at one of the EBX units could hamper banks’
profits, “that hit would be manageable as banks in Brazil are
well capitalized,” said Mario Pierry, head of equity research
with Deutsche Bank Securities in S GBPo Paulo.
GOVERNMENT BAILOUT UNLIKELY
With a growing imbalance between assets and liabilities,
dwindling cash and limited fundraising options, Batista is
appealing to banks to avert the conglomerate’s collapse,
investors said.
To stay current on obligations, Batista is putting up for
sale more of his remaining stake in mining company MMX Minera GBPo
e Met ¡licos SA, another source with knowledge of the
company’s situation told Reuters in late June.
Batista is in talks to sell the MMX stake to help repay $1
billion owed to Ita ? and Bradesco, the source added. The
proceeds, combined with money from the March sale of a stake in
power producer MPX Energia SA, should be more than
enough to cover those obligations, the source added.
Batista also cut debt to Abu Dhabi sovereign-wealth fund
Mubadala Development Co to about $1.6 billion from
about $2.3 billion, the same source said.
Yet the biggest challenge will be reorganizing OGX, which
might not be able to support payments on $3.63 billion of bonds
even after a radical downsizing, one of the sources said. OGX is
slowing output at its only oil and gas producing field and
scrapped three offshore projects that were consuming too much
cash.
When all is said and done, Batista – who often boasted that
he would become the world’s richest man – will have a much more
modest fortune and will likely live off dividends from some of
the EBX companies that survive, one of the sources said.
($1 = 2.24 Brazilian reais)
(Editing by Todd Benson and Claudia Parsons)
