San Jose and unions make final argument in battle over pension cuts

Tue Sep 10, 2013 8:43pm EDT

* Case watched by other U.S. cities wanting to cut pensions

* Unions say promised pension benefits can never be cut

* City, voters argue pension cuts needed to save services

By Tim Reid

Sept 10 (Reuters) - California's third largest city, San Jose, and its employee unions presented final court arguments on Tuesday in a case that has major implications for other cash-strapped local authorities wanting to cut pensions, including bankrupt Detroit.

Even though voters in San Jose overwhelmingly backed a measure last year that would cut pensions for new workers and force current employees to contribute more to their retirement benefits, the city's unions sued, claiming the reforms were unconstitutional.

Both sides, following a judge's request made at the end of a five-day trial last month, filed voluminous closing arguments and summaries late Tuesday, much of which will likely be reprised in the litigation between unions and city authorities in Detroit, which filed for the biggest municipal bankruptcy in U.S. history in July.

San Jose's pension overhaul was promoted by Democratic mayor Chuck Reed and approved by 70 percent of voters in 2012. Reed believed it was the best way to alleviate an acute budget shortfall and a rapidly growing unfunded pension liability, which sits at nearly $3 billion, and to save further cuts to essential city services.

City workers, led by San Jose's police union, sued, demonstrating how difficult it is for local governments in the United States - even with a reform measure backed by voters - to rein in soaring pension and other retirement costs.

In its legal brief on Tuesday, the San Jose Police Officers' Association argued that "Measure B", the pension reform initiative, violated the vested pension and other retirement rights of city workers.

"Those rights cannot be legislated away by defendant city of San Jose, or the voters," the union argued, "because such rights are protected by the California Constitution and the parties' collective bargaining agreement."

The city fired back in its 70-page brief, arguing that it was for the police and other unions to prove that Measure B was illegal and unconstitutional. In that regard, the city argued, the unions "failed to proffer any testimony or other evidence."

Michael Sweet, a San Francisco bankruptcy attorney and who is not involved in the case, said the San Jose litigation is being closely watched by other U.S. cities, including those already in bankruptcy such as California's Stockton and San Bernardino, and Detroit in Michigan.

"Even though San Jose isn't in bankruptcy, what they are doing is addressing the same kind of pension issues being faced in those bankrupt cities," Sweet said. "Mayor Reed's measure was an approach to addressing these pension issues, which in some instances have become unsustainable."

San Jose's pension reform has not yet been adopted because of the unions' lawsuit. The city's pension spending rose to $245 million last year from $73 million in 2001. The city has had to slash other spending and services to try and balance its budget.

The court case consolidated five lawsuits brought by two unions, individual employees and retirees. The judge overseeing the case has scheduled an October 10 hearing, ahead of a final ruling.

The case is in Santa Clara County Superior Court, No. 1-12-CV-225926

(Reporting by Tim Reid; Editing by Bob Burgdorfer)

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Detroit woes complicate Michigan city, town borrowing -governor

By Nick Carey

DETROIT, Sept 10 | Tue Sep 10, 2013 9:05pm EDT

DETROIT, Sept 10 (Reuters) - Detroit's bankruptcy filing has made it harder for Michigan's municipalities to tap America's municipal bond market but it is difficult to say exactly how much impact it has had, the state's governor said in an interview Tuesday.

"I think it's probably made it more challenging but it's difficult to say what degree you would put on that," Republican Governor Rick Snyder told Reuters in a phone interview while on a trip to China to promote investment and tourism in Michigan. "But the whole thing is it's hard to tell because there are a number of issues in the debt markets these days. It's becoming more challenging. Period."

Facing some $18.5 billion in long-term debt, Detroit filed for bankruptcy on July 18. If the federal judge presiding over the case allows the bankruptcy to proceed it would be the largest Chapter 9 municipal bankruptcy case in U.S. history.

Kevyn Orr, the state-appointed emergency manager overseeing the city's finances, has offered creditors pennies on the dollar and the bankruptcy case is expected to be costly and protracted.

Since the filing in July, some in America's $3.7 trillion municipal bond market have been wary of debt coming out of Michigan.

Some local Michigan issuers have delayed planned debt sales because of a spike in yields since, which has spooked some retail buyers.

In August, investors demanded and obtained a very high interest rate on $92 million debt issued by Detroit's school system.

"We haven't had major pushback (from Michigan municipalities on problems with debt issuance), we've had calls giving us updates on how their financings are going," Snyder said. "But I would say that it's something that we're watching and having discussions with people on."

Earlier on Tuesday, the governor agreed to give a deposition to creditors' lawyers ahead of the pending bankruptcy case, after the attorney general's office had argued on his behalf against the move citing executive privilege.

Public sector unions in particular have maintained that Snyder and Orr colluded to push Detroit into bankruptcy in order to strip city workers of benefits and pay, which are protected by Michigan's constitution.

"We're just following through with the legal process and make sure we're focused on turning Michigan around in terms of getting better services to citizens," Snyder said. "We had a lot of discussions and in the end we made a voluntary decision to do the deposition."

Snyder also said that despite Detroit's dire financial situation, there would be no massive injection of state aid to resolve its problems.

"I've been very consistent on that and the state is not going to bail out Detroit," he said. "Nor would I recommend the federal government bail out Detroit with respect to the debt situation."

"We have done a lot and will continue to do a lot to help enhance the quality of services for Detroit because I think that has lasting value," he added.

The governor has frequently run into opposition from conservatives within his own party, especially on the implementation of parts of Democratic U.S. President Barack Obama's signature health care reform.

Conservatives blocked a state health care exchange designed to allow uninsured Michigan residents to sign up for government-subsidized health insurance as part of "Obamacare." Instead, a federally run exchange for Michigan will take effect on Oct 1.

"My continuing view is we could have done a better job at the state level," Snyder said. "But I'll leave it up to the federal government to effectively implement what they said they were going to do."

The governor added that he would have preferred to borrow from the experience of travel web sites Expedia and Orbitz to set up a state-level exchange.

"That would be more user friendly and borrowing from the private sector things that work because most of us buy our tickets that way when we travel," he said.

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Credit Suisse to sell first Tier 2 CoCo in euros

By Aimee Donnellan

Wed Sep 11, 2013 4:25am EDT

LONDON, Sept 11 (IFR) - Credit Suisse is testing investor interest for the first euro-denominated Tier 2 CoCo bond on Wednesday morning at mid-swaps plus low 400s.

Credit Suisse is the sole bookrunner on the 12 non-call seven-year permanent write-down bond, with Banca IMI, Commerzbank, RBS and Wells Fargo acting as joint lead managers.

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Detroit hits back against opposition to its bankruptcy

By Tom Hals

Sept 6 | Fri Sep 6, 2013 11:18pm EDT

Sept 6 (Reuters) - Attorneys for Detroit made their case for the city's request for bankruptcy in court papers on Friday, knocking down individual objections to the process and saying filing for protection would not necessarily cut pensions.

Unlike corporations or individuals, the city must prove it is eligible for bankruptcy protection from creditors, and oral arguments are set to begin later this month in the U.S. Bankruptcy Court in Detroit.

In the court papers filed on Friday, the city refuted objections one-by-one, taking on the unions, pension funds and other creditors who are expected to oppose the Detroit Bankruptcy in a series of hearings starting later this month.

The Detroit argument appears constructed to meet each of the qualifications for bankruptcy under Chapter 9 of the federal bankruptcy code.

To proceed into bankruptcy, Detroit must overcome 109 objections filed in court, mostly from labor unions, that range from accusations that the city failed to negotiate in good faith to claims that Detroit's state-appointed emergency manager, Kevyn Orr, overstepped his legal authority by filing for bankruptcy.

Detroit's filing is focused on persuading federal bankruptcy judge Steven Rhodes that the city is insolvent, had the legal authority to file, and intends to implement a debt-reduction plan. Detroit also must show that it either negotiated in good faith with its creditors or that the number of creditors is so large that negotiations were not feasible.

"Confronting a state-declared 'financial emergency' that includes approximately $18 billion in debt, over 100,000 creditors, over 100 discrete bond issuances and related loans (as well as multiple insurers of such bonds) and nearly 50 union bargaining units representing the City's employees - all of which rendered any out-of-court solution impracticable - the City commenced this Chapter 9 case on July 18, 2013," the city argues in an opening passage of its filing.

The city takes on the basic requirement of financial insolvency head on. The petition states that Detroit was "cash insolvent," "budget insolvent" and "service delivery insolvent". Without restructuring, Detroit states, it will experience negative cash flows since it says it cannot materially increase its revenues or reduce its expenses.

Claims that Detroit was not insolvent "offer little more than innuendo and suspicion," according to the filing.

Negotiations were not feasible, Detroit added, because "the numerosity and fragmented nature of the City's creditors made negotiations with the creditor body impracticable."

No bond holders filed objections to Detroit's Chapter 9 petition, and the city notes that fact in arguing that no bondholders claimed negotiations could be feasible.

Unions that object to the filing have claimed Detroit's bankruptcy filing, in federal court, violates the U.S. Constitution's protection of states' rights. Detroit countered with a direct response in its brief: "Because States have a 'legitimate choice' whether to allow their municipalities to invoke Chapter 9, Chapter 9 is not an unconstitutional infringement of State sovereignty."

Objectors to Detroit's bankruptcy also claim Detroit's filing violates a prohibition in Michigan's state constitution against any "diminishment or impairment" of public-employee pensions, but the city argues that no impairment has taken place simply as a result of the Chapter 9 filing. "After the Governor authorized the City to file this case, and even after the City filed the Petition, the City's pension obligations have remained unimpaired," the city argues.

The city's attorneys also said authorizing Chapter 9 would not "diminish or impair any pension. These are simply steps that begin the bankruptcy process."

The city said many of its 48 unions refused to negotiate on behalf of their retirees, leaving it unable to bind 20,000 retirees with a single agreement.

"The majority of the unions either expressly indicated unwillingness or legal inability to represent retirees or neither agreed nor refused to represent retirees," said the 135-page document. Chapter 9 would help to solve that problem by allowing formation of a committee of retirees to negotiate on behalf of retired workers.

Chapter 9 bankruptcy, if granted, would give Detroit broad latitude to deal with creditors while seeking to reorganize its finances and reinvigorate one of the country's most blighted urban areas. The city's population has plummeted to less than 700,000 from nearly 2 million over the past half century. City services have broken down, thousands of homes have been abandoned and crime has soared.

Orr has said he wants the city to be out of court by the time his term is scheduled to end in the fall of 2014.

Unions sued Governor Rick Snyder before the bankruptcy was filed in hopes a state court judge would find that by authorizing a Chapter 9, the governor was violating the state constitution which protects public pensions. The U.S. Bankruptcy Court stayed those lawsuits.

In papers filed Friday, the state of Michigan asked the U.S. Bankruptcy Court to reject those arguments or set them aside for when the court will consider Detroit's plan to cut its debt.

There have been fewer than 700 municipal bankruptcies over the past 80 years, and many cities have been found to be ineligible. A bankruptcy judge ruled in 2011 that Harrisburg, the capital of Pennsylvania, lacked the legal authority for its bankruptcy petition.

However, bankruptcy experts generally expect Judge Rhodes will find Detroit eligible for bankruptcy. Even then, city still is expected to face challenges to its plans, particularly involving disputes over the legality of cutting pensions and disputes over the treatment of certain bonds as unsecured.

Rhodes has set five hours of oral arguments for Sept. 18 on purely legal questions, such as the constitutionality of Chapter 9 and whether his court has jurisdiction.

Rhodes will oversee a trial beginning Oct. 23 on factual disputes over the city's solvency and whether it negotiated in good faith. On Tuesday, Rhodes will hear arguments about whether Gov. Snyder must testify.

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German wind farm developer Windreich files for insolvency

FRANKFURT, Sept 9 | Mon Sep 9, 2013 3:56pm EDT

FRANKFURT, Sept 9 (Reuters) - Windreich AG, Germany's largest developer of offshore wind farms, has filed for insolvency and its chief executive has stepped down after financing talks for a 400 megawatt (MW) project stalled.

The company made its filing with a German court late last week and now its CEO Willi Balz, who also owns the group, has resigned effective immediately, Windreich said in a statement late on Monday.

"In talks with our investors it became clear that a change in management was a prerequisite for the successful continuation of talks," Windreich's new chief Werner Heer said.

Windreich plans, builds and sells wind parks and is a key player in Germany's offshore wind park expansion.

Balz told Reuters last year that he hoped to sell the 400 megawatt MEG I project by the end of 2012, and that 700 million of the 800 million euros in equity needed for the project had already been committed.

Heer said in Monday's statement that talks with institutional investors were now on the home stretch. He and Windreich's other managers will write up a restructuring plan over the coming weeks that should leave MEG I unaffected and will present it to creditors and investors.

MEG I is a project to build a wind farm about 45 km north of the German North Sea island Borkum. According to Windreich's website, construction of MEG I is scheduled to be completed by the end of 2015. (Reporting by Maria Sheahan and Alexander Huebner; Editing by Alison Williams)

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CORRECTED-Furniture Brands files for bankruptcy, seeks sale to Oaktree

Mon Sep 9, 2013 4:15pm EDT

(Corrects 2d paragraph to show Lane Furniture, not Lane Ventures, is excluded from the sale.)

Sept 9 (Reuters) - Furniture Brands International Inc filed for Chapter 11 bankruptcy protection on Monday and said it plans to sell most of its business, which includes names such as Thomasville, Drexel Heritage and La Barge.

The St. Louis-based company said in a statement it agreed to sell all of its brands except Lane Furniture to Oaktree Capital Management, an investment firm that specializes in buying assets from bankrupt companies.

The sale agreement will be subject to higher bids and a court-supervised auction. The money from the auction will be used to repay Furniture Brands creditors.

The company's pink sheet stock was down 33 cents or 57 percent at 24 cents per share in afternoon trading.

Oaktree also committed to providing a $140 million debtor-in-possession or DIP loan to finance the bankruptcy case.

The company said in documents filed in Delaware's U.S. Bankruptcy Court that it estimated its assets were worth $546.7 million and its liabilities were worth $550.1 million.

It said its largest creditors were LP Products PTE Ltd, a trade creditor owed $2.5 million, and the Pension Benefit Guaranty Corp, a government insurer of defined-benefit pensions.

The case is Furniture Brands International Inc, U.S. Bankruptcy Court, District of Delaware, 13-12329. (Reporting by Tom Hals in Wilmington, Delaware; Editing by James Dalgleish and Leslie Gevirtz)

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Bankrupt Patriot Coal reveals creditor payback plan

Fri Sep 6, 2013 6:45pm EDT

* Plan would pay back secured creditors, wipe out shareholders

* Mine workers' union would receive equity stake in reorganized Patriot

By Nick Brown

Sept 6 (Reuters) - Patriot Coal Corp on Friday filed a restructuring plan that would pay back secured creditors and wipe out shareholders, four weeks after reaching new, cost-saving labor contracts with unionized workers.

In court papers filed in U.S. Bankruptcy Court in St. Louis, Patriot detailed a plan that would pay back secured creditors in cash while cutting recoveries for unsecured creditors, who would be given equity in the restructured Patriot. Current equity holders are not expected to recover anything.

Patriot in a statement said it will provide more detail on the plan next week. A spokesman for the company declined to comment. The plan still needs the support of creditors, along with approval by Judge Kathy Surratt-States.

Patriot's restructuring is closely tied to its efforts to cut back on the high labor costs it listed as a key factor in its bankruptcy filing last year. The company reached new labor deals in August after a long fight with unionized workers, enabling it to forecast creditor recoveries and draw up a payback plan.

Under the new labor terms, Patriot will reduce wages, overtime pay and vacation, and eliminate shift differentials for 1,700 unionized workers. Retiree healthcare and pension benefits, meanwhile, will be transferred to an outside trust. The United Mine Workers of America, which represents 13,000 Patriot retirees and their relatives, will receive a roughly 35 percent equity stake in the reorganized Patriot, which it can sell to help bolster those benefits.

Patriot was a casualty of a coal industry hurt by weak coal prices, caused in part by a glut of natural gas. That Patriot's miners will sustain much of the pain of the company's restructuring has made the case vitriolic, with the union staging myriad protests and rallies before reluctantly agreeing to new deals.

The union has bargained for lifetime healthcare and pension benefits since the 1940s, considering those benefits sacrosanct. But companies have become less able to afford them in the face of modernization, a shrinking workforce and the growing prevalence of new sources of energy.

The union has said any benefits Patriot cannot afford should be paid by Peabody Energy Co, which created Patriot through a 2007 spinoff. In a lawsuit filed last year, the union said Peabody designed Patriot to fail by loading it with hefty debt and weak assets, and should remain on the hook for worker benefits.

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Fired MF Global workers to appeal dismissal of lawsuit

Sept 6 | Fri Sep 6, 2013 2:32pm EDT

Sept 6 (Reuters) - MF Global employees fired after the broker's epic collapse will appeal a court ruling dismissing their allegations that they were not given proper notice of their terminations.

In papers filed on Friday in U.S. Bankruptcy Court in Manhattan, the employees said they would appeal Judge Martin Glenn's Aug. 23 decision.

More than 1,000 workers were axed when the commodities broker, run by former New Jersey Governor Jon Corzine, filed a $40 billion bankruptcy on Oct. 31, 2011. In a class action, the employees said they should have been given notice under the Worker Adjustment and Retraining Notification (WARN) Act, which requires employers to give notice of mass layoffs.

Judge Glenn twice rejected the lawsuit - once in October of 2012 and again last month - after giving the plaintiffs a chance to amend their case.

In his latest ruling, Glenn said MF Global's broker-dealer unit, which employed the workers, was shut down not by the MF parent, but by the Securities Investor Protection Corp, which insures customers of failed brokers. The workers thus cannot hold MF Global liable for the decision, Glenn said.

MF Global became a political firestorm after regulators discovered that the firm had improperly used customer cash to cover liquidity gaps. Corzine and other directors face civil lawsuits, but have not faced criminal charges.

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Detroit hits back against opposition to its bankruptcy

By Tom Hals

Sept 6 | Fri Sep 6, 2013 11:18pm EDT

Sept 6 (Reuters) - Attorneys for Detroit made their case for the city's request for bankruptcy in court papers on Friday, knocking down individual objections to the process and saying filing for protection would not necessarily cut pensions.

Unlike corporations or individuals, the city must prove it is eligible for bankruptcy protection from creditors, and oral arguments are set to begin later this month in the U.S. Bankruptcy Court in Detroit.

In the court papers filed on Friday, the city refuted objections one-by-one, taking on the unions, pension funds and other creditors who are expected to oppose the Detroit Bankruptcy in a series of hearings starting later this month.

The Detroit argument appears constructed to meet each of the qualifications for bankruptcy under Chapter 9 of the federal bankruptcy code.

To proceed into bankruptcy, Detroit must overcome 109 objections filed in court, mostly from labor unions, that range from accusations that the city failed to negotiate in good faith to claims that Detroit's state-appointed emergency manager, Kevyn Orr, overstepped his legal authority by filing for bankruptcy.

Detroit's filing is focused on persuading federal bankruptcy judge Steven Rhodes that the city is insolvent, had the legal authority to file, and intends to implement a debt-reduction plan. Detroit also must show that it either negotiated in good faith with its creditors or that the number of creditors is so large that negotiations were not feasible.

"Confronting a state-declared 'financial emergency' that includes approximately $18 billion in debt, over 100,000 creditors, over 100 discrete bond issuances and related loans (as well as multiple insurers of such bonds) and nearly 50 union bargaining units representing the City's employees - all of which rendered any out-of-court solution impracticable - the City commenced this Chapter 9 case on July 18, 2013," the city argues in an opening passage of its filing.

The city takes on the basic requirement of financial insolvency head on. The petition states that Detroit was "cash insolvent," "budget insolvent" and "service delivery insolvent". Without restructuring, Detroit states, it will experience negative cash flows since it says it cannot materially increase its revenues or reduce its expenses.

Claims that Detroit was not insolvent "offer little more than innuendo and suspicion," according to the filing.

Negotiations were not feasible, Detroit added, because "the numerosity and fragmented nature of the City's creditors made negotiations with the creditor body impracticable."

No bond holders filed objections to Detroit's Chapter 9 petition, and the city notes that fact in arguing that no bondholders claimed negotiations could be feasible.

Unions that object to the filing have claimed Detroit's bankruptcy filing, in federal court, violates the U.S. Constitution's protection of states' rights. Detroit countered with a direct response in its brief: "Because States have a 'legitimate choice' whether to allow their municipalities to invoke Chapter 9, Chapter 9 is not an unconstitutional infringement of State sovereignty."

Objectors to Detroit's bankruptcy also claim Detroit's filing violates a prohibition in Michigan's state constitution against any "diminishment or impairment" of public-employee pensions, but the city argues that no impairment has taken place simply as a result of the Chapter 9 filing. "After the Governor authorized the City to file this case, and even after the City filed the Petition, the City's pension obligations have remained unimpaired," the city argues.

The city's attorneys also said authorizing Chapter 9 would not "diminish or impair any pension. These are simply steps that begin the bankruptcy process."

The city said many of its 48 unions refused to negotiate on behalf of their retirees, leaving it unable to bind 20,000 retirees with a single agreement.

"The majority of the unions either expressly indicated unwillingness or legal inability to represent retirees or neither agreed nor refused to represent retirees," said the 135-page document. Chapter 9 would help to solve that problem by allowing formation of a committee of retirees to negotiate on behalf of retired workers.

Chapter 9 bankruptcy, if granted, would give Detroit broad latitude to deal with creditors while seeking to reorganize its finances and reinvigorate one of the country's most blighted urban areas. The city's population has plummeted to less than 700,000 from nearly 2 million over the past half century. City services have broken down, thousands of homes have been abandoned and crime has soared.

Orr has said he wants the city to be out of court by the time his term is scheduled to end in the fall of 2014.

Unions sued Governor Rick Snyder before the bankruptcy was filed in hopes a state court judge would find that by authorizing a Chapter 9, the governor was violating the state constitution which protects public pensions. The U.S. Bankruptcy Court stayed those lawsuits.

In papers filed Friday, the state of Michigan asked the U.S. Bankruptcy Court to reject those arguments or set them aside for when the court will consider Detroit's plan to cut its debt.

There have been fewer than 700 municipal bankruptcies over the past 80 years, and many cities have been found to be ineligible. A bankruptcy judge ruled in 2011 that Harrisburg, the capital of Pennsylvania, lacked the legal authority for its bankruptcy petition.

However, bankruptcy experts generally expect Judge Rhodes will find Detroit eligible for bankruptcy. Even then, city still is expected to face challenges to its plans, particularly involving disputes over the legality of cutting pensions and disputes over the treatment of certain bonds as unsecured.

Rhodes has set five hours of oral arguments for Sept. 18 on purely legal questions, such as the constitutionality of Chapter 9 and whether his court has jurisdiction.

Rhodes will oversee a trial beginning Oct. 23 on factual disputes over the city's solvency and whether it negotiated in good faith. On Tuesday, Rhodes will hear arguments about whether Gov. Snyder must testify.

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OGX may present restructuring plan to bondholders on Tuesday

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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