By Joan Magee
Thu Sep 5, 2013 6:18pm EDT
NEW YORK, Sept 5 (IFR) - OGX could ask bondholders as soon as Tuesday to inject USD250m-USD500m in cash alongside a plan to convert USD3.6bn in debt to equity, said an investor who had been involved in negotiations with the troubled oil company owned by businessman Eike Batista.
The decision on how to restructure has to be a quick one.
OGX faces bond interest payments of about USD40m in October and USD100m in December, but the investor called October 28 the "drop dead date," by which the company has to restructure in order to avoid default.
"Hearing this news is the quickest way to put fear into the bondholders," said the distressed debt investor. "Before they were afraid they wouldn't get their money back and now they're having to consider paying USD250m to USD500m in order to get any kind of return. I'd think the likely number would be closer to USD250m."
After the news came out earlier today through new Folha de S Paulo, the OGX 2022s dropped 15.75 mid-market, only to end the day at around 17.00 mid-market.
In the middle of last year, OGX failed to meet oil production targets, something the investor said came down to not having done the proper geological homework in terms of how to extract the oil once it had been found.
"There's not a tangible value here yet, so you're speculating and buying oil blocks and hoping the oil comes up," he added. "It was really an equity trade. You're really making equity bets when you're investing in something like that. It was the wrong capital structure to have USD4bn in debt."
This comes after Batista sold another 177.2m shares between August 29 to September 3, according to a regulatory filing. Since March 2013, Batista has sold 11.14% of the company. Batista asserted that he still controls over 50.01% of the outfit.
Last week, around 50% of holders of OGX's USD3.6bn in bonds assembled with the help of Rothschild to engage with the outfit. OGX hired Blackstone Group as a financial adviser earlier in August. Its cash position, as of end-June, stood at USD326m, an amount that would not cover expenses over the next six months.
"Some possibilities of what could happen are a pre-pack filing or a tender or an agreement to clip all the coupons until the end as they secure more capital," said the investor.
Meanwhile, Batista still hopes to sell a 40% stake in the Tubarao Martelo field for USD850m to state-owned Malaysian company Petronas, in a deal that would provide a lifeline to his company.
SECOND THOUGHTS
However, Petronas says it will only close the deal after OGX restructures its debt.
Petronas Chief Executive Shamsul Azhar Abbas said OGX's "debt restructuring has to happen first" for the deal to be finalized.
The acquisition of the stake "is still pending clarity with regard to the restructuring exercise," Abbas told reporters in Kuala Lumpur.
In a regulatory filing last week OGX responded: "Petronas does not have the right to delay the closing of the deal with OGX as long as the conditions established in the contract are met, none of which mentions debt restructuring."
"It is extremely complicated and there are a lot of moving parts," said the distressed debt investor. "At the end of the day, every premise is based on the success of Tuberao Martelo having oil and of the possibility that this oil may be lifted economically. It may be that Petronas is backing out after all, as it may be too hot for them to handle."
OGX had also been fined about USD1.41m for suspending development in the Tubarao Tigre, Tubarao Garo and Tubarao Areia fields. The company said it would not to take on any exploratory risk in areas where it had failed to secure partnerships.
"If there isn't a way to get that oil out of the ground, then the bondholders are losing that USD3.6bn in debt and another USD250m to USD500m if OGX is wrong again," said the investor. "It's not that they didn't find oil in other fields. It's that it was poorly executed, and that they didn't do the requisite analysis and ran out of money before."
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