By Shane McGinley
Thursday, 31 October 2013 5:52 PM
Brazil’s EBX Group, the holding company founded by former billionaire Eike Batista and which Abu Dhabi’s Mubadala owns a stake in, this week filed bankruptcy protection proceedings for its ailing oil subsidiary OGX, it has confirmed.
Latin America's largest-ever corporate bankruptcy filing, the move came after OGX, which has seen its shares slump by around 95 percent this year, failed to reach an agreement with creditors to renegotiate part of its $5.1 billion debt load.
If the court approves the request, OGX will have 60 days to come up with a restructuring plan and will then have 30 days to endorse or reject the plan.
The filing in a Rio de Janeiro court on Wednesday marks the latest chapter in the unravelling of Eike Batista's once high-flying industrial empire, with his personal fortune reduced by over $30 billion in the last 18 months.
In March last year Mubadala, Abu Dhabi’s investment vehicle, reportedly paid around $2bn for a 5.6 percent stake in EBX Group, Batista's holding company which owns OGX.
In July, Mubadala restructured approximately $2.3bn worth of debt owed by EBX, reducing the amount the conglomerate owes Abu Dhabi by more than 25 percent, Reuters reported. Under terms of the refinancing accord, EBX repaid a "significant part of Mubadala's initial investment" and reworked contractual aspects, giving Mubadala an additional cushion on its investment in EBX, the company said.
"OGX is not part of the agreement signed in July with EBX. The July agreement gives Mubadala improved protection for the remaining portion of its investment against certain assets,” a Mubadala spokesperson told Arabian Business on Thursday.
“Mubadala remains in close discussions with EBX and a number of interested parties, as EBX continues to restructure its business,” he added.
Batista's decline in recent months has become a symbol of Brazil's own economic woes. After a decade-long boom in which investors poured cash into Brazil and Batista's enterprises, Latin America's largest economy has been in a rut for three years.
OGX's decision to seek protection from creditors came as no surprise. After missing a $44.5 million interest payment owed to bondholders on October 1, OGX scrambled to restructure its debt before the end of a 30-day grace period or be declared in default on $3.6 billion in bonds.
The process was rocky from the outset, and OGX called off the talks with creditors on Tuesday, leaving a bankruptcy filing as the only viable option to buy it more time.
In July a Mubadala spokesperson told Bloomberg many of EBX’s assets still have significant value to a number of parties, including the wealth fund, and it may be interested to invest in more assets owned by Batista.
Brazil's 8-year-old bankruptcy law is similar to US Chapter 11 proceedings, and gives OGX a chance to reduce its liabilities and emerge as a going concern. Bondholders will play a key role in the process, though in recent cases - such as those of power companies Celpa SA and Grupo Rede Energia SA - some creditors complained that judges privileged the claims of state-owned banks over theirs.
Indeed, bankruptcy cases have not always moved smoothly through Brazilian courts and some judges have been sympathetic to pressure from different stakeholder groups like employees, pensioners and shareholders, at times putting their interests above those of creditors, said Paulo Rabello de Castro, head of SR Rating, a Brazilian credit rating agency.
OGX was founded in 2007 and raised $1.3 billion from private investors to buy oil concessions in November of the same year, a month after state-run Petroleo Brasileiro SA, or Petrobras, announced the discovery of a giant offshore oil province south of Rio de Janeiro.
Seven months later, Batista raised 6.7 billion reais ($4.1 billion) for OGX in an initial public offering in what was at the time the biggest IPO in Brazilian history.
A year after that he was drilling wells. A period of rapid success in finding oil led OGX to briefly outstrip Petrobras as the most successful explorer in Brazil by strikes registered.
OGX pumped its first oil in January 2012, but by mid-year it became clear that the field would not produce near expectations and the company's stock began a drawn-out decline.
In the last year alone, OGX's share price has plunged about 95 percent, making it the worst performer on the BM&FBovespa Stock Exchange's main index.