Monday, November 11, 2013

OGX highlights flaws in Brazil's bankruptcy laws

By way of follow up to our recent posts regarding the OGX bankruptcy filing.


On the afternoon of Friday June 28, Brazilian tycoon Eike Batista met fellow directors of his now bankrupt flagship oil operator OGX for a board meeting that would become notorious among its creditors.
Conducted at his art deco headquarters in Mahatma Gandhi square, Rio de Janeiro, the meeting agreed to transfer $449m - or more than half the company's fast-dwindling cash pile - to a sister company, oil services company OSX, which is about 75 per cent owned by Mr Batista.
That meeting lasted until 6pm, company documents show. Half an hour later, the same men, plus one other director met again, changing hats to represent the OSX board.
"The board . . . unanimously and without exception decided to approve the agreement with OGX," an OSX document said.
Three days later, OGX declared its only producing oil wells were flops and would close, setting it on course for last week's announcement of Latin America's biggest corporate default with up to $6.7bn in liabilities.
Today, OSX is also considering bankruptcy protection but its financial position looks better than that of its sister company, partly due to that $449m. There is no suggestion that OGX broke the law. But the last-minute transfer has outraged investors and creditors, who will be lucky to recover a few cents on the dollar.
From a cash position of $1.15bn on March 31, OGX ended June with cash of $326m - thanks largely to the transfer.
"It shows to the world that Brazil is not a serious place to do business," said Aurelio Valporto, who is leading a group of OGX shareholders planning to sue Mr Batista and the company's directors.
Critics say the 11th-hour cash payment and other issues at OGX point to governance problems at Mr Batista's family-controlled EBX Group, a closely inter-connected pyramid of start-up oil, mining, energy and logistics companies.
They are set to highlight flaws in Brazil's bankruptcy law that are only now becoming apparent as the economy slows.
"We finally have a big bankruptcy case in Brazil so that all the weaknesses in the law - and there are many - can finally be exposed," says Rafael Fritsch at JGP Credito, a distressed assets investor.
The company first disclosed the cash payment to the market in the same statement on July 1 as it announced that its only producing wells would be closed.
The payment to OSX was to compensate the company for cancelling contracts for equipment and to help it complete a third floating oil platform, the OSX-3, and another vessel, to be deployed on its remaining oilfield under development.
OSX says the payment was in accordance with a contract governing compensation, signed with OGX in 2010 and already disclosed to the market. OGX did not respond to requests for comment.
But inconsistencies in company statements about the payment soon emerged. In its July 1 announcement, the company said it would make "an immediate cash payment" to OSX of $449m.
However, buried in its second-quarter results, OGX said it had in fact already disbursed most of this money, or $369m, before June 30.
In other words, it had already been transferring the money to OSX before notifying shareholders of its decision on July 1.
Sandra Guerra, head of the Brazilian Institute of Corporate Governance (IBGC), said companies must inform the market immediately when they are obliged to fulfil the terms of such a contract, even if that contract is already public.
"If it could have an impact on their business and their share price, they must provide prior warning to the market," she said, declining to comment on the case of OGX and OSX itself.
Only 10 days earlier, three respected independent directors of OGX had resigned without explanation.
"The settlement had to be approved by the independent directors but three resigned before it was agreed," said one person familiar with the creditors' position.
The resignation of the trio left OGX with two independent directors, who resigned on July 10.
Whatever the circumstances surrounding the transfer, it is likely to become a source of lawsuits for OGX. Lawyers said these would not necessarily completely derail a restructuring plan for OGX. But creditors of OGX would be likely to use the cash transfer to negotiate to reduce the rival claims of OSX, which is also a major creditor of the oil company.

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