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Still got swagger

30 October 2013 By Christopher Swann

Even bankruptcy can’t subdue Eike Batista’s bombast. As his flagship oil company OGX Petroleo e Gas Participacoes sought protection on Wednesday from creditors, the Brazilian tycoon was practically goading them. He just sold gas assets at a knockdown price to an electric utility he partly owns. Bondholders still have a better chance of recovering more money by injecting fresh cash. Pushing them too far, though, could lead to a painful liquidation for all.

The filing in a Rio de Janeiro court underscores the rapid descent of a man who was one of the world’s 10 richest just 18 months ago. OGX was the lynchpin of Batista’s EBX conglomerate, whose six listed companies were collectively worth about $60 billion at the peak in 2010. Investors including BlackRock and Pimco probably will get no more than 10 cents on the dollar for their $3.6 billion. The cash-strapped company says it will have to cease operations altogether by year’s end without a $250 million infusion.

Batista is still playing hardball, though. The OGX sale of its gas operations on Monday for $91 million, if allowed by the courts, robs bondholders of one of the company’s few tangible assets. With gas production equivalent to more than 20,000 barrels a day, OGX’s stake in the unit is worth at least twice the purchase price, according to recent deal comparisons by Morningstar. Batista also stands to personally benefit. He owns around a quarter of the buyer, Eneva, one of the few financially stable remnants of EBX.

Despite hefty losses, creditors have an incentive to keep the company afloat a little longer. OGX says it is just a month away from starting production of its final promising field. Success could cut their losses. By contrast, a liquidation of OGX might prompt the government to revoke drilling rights, and thus eliminate much of the residual value.

Batista’s bravado also reflects the dynamics of Brazilian bankruptcy law. He retains an ability to veto creditor proposals. Even so, the former billionaire may be overplaying his hand. The gas deal could easily embolden bondholders to push back harder still or dissuade them, out of principle or some other reason, from throwing good money after bad. And that would humble everyone involved in this Brazilian mess once and for all.


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