Two days ago, former Brazilian billionaire Eike Batista crossed a line.
He started to default on a $US45 million interest payments on his oil and gas company, OGX’s, bonds. The default will be official on October 30th, says Bloomberg.
That leaves bondholders, like PIMCO, the largest bond fund in the world helmed by legendary investor Bill Gross, taking a massive hit.
And what’s worse is that there could be more to come, according to the Wall Street Journal:
OGX has a little more than $US3.6 billion in bonds outstanding, including $US1.06 billion of bonds maturing in 2022 and $US2.6 billion of bonds due in 2018. Tuesday’s payment would have been on the 2022 bonds. Standard & Poor’s said it expects OGX to fail to make its next payment on the 2018 bond as well.
If Batista defaults, it would be the larges corporate default in the history of a Latin American company. Fitting for a man whose fall from grace has become larger than life.
In the spring of 2012 he was the 7th richest man in the world (worth $US35 billion) with a six company commodities empire in one of the fastest growing countries in the world. Now he’s lost 99% of his wealth and his empire is falling apart. Brazil, almost shadowing Batista, is facing serious questions about its economic malaise as well.
No part of this story is as dire or reflective of the broken promise of Batista (and in a sense, Brazil) as OGX’s collapse. Its problems are not hard to understand. The company forecasted product that it could not deliver. The fields Batista gave names like ‘Hammer Head’ did not produce the riches he expected.
Batista’s hope is to restructure his empire, get more cash from investors, and go on developing his oil fields — that’s why he’s withholding cash.
OGX’s investors, led by PIMCO, have lawyered up, and hired Rothschild to advise on the deal that’s coming. According to Bloomberg, Batista will them ask for $US250 million in addition to the restructuring $US3.6 billion worth of OGX debt.
It’s not completely unreasonable for Batista to think this is possible. Last month he managed to restructure the $US2 billion loan he got from Mubadala Development Corp., Abu Dhabi’s sovereign wealth fund. The terms of the deal are unknown.
Moreover, given Brazil’s track record for settling defaults, it may be in the best interest of bondholders to restructure. According to the World Bank, Brazil ranks 143rd out of 185 economies when it comes to insolvencies.
So Eike could hold on, for a little while.