By Guillermo Parra-Bernal and Tom Hals
SAO PAULO/WILMINGTON, Del. Oct 7 (Reuters) - Brazilian oil producer OGX Petróleo e Gas Participações SA is meeting with U.S. creditors in New York on Monday in a bid to jump-start rescue talks while banks scamper to arrange an emergency loan for the company if no deal is reached, sources with knowledge of the situation told Reuters.
Creditors were set to meet with a new advisory team for controlling shareholder Eike Batista aimed at averting a bankruptcy filing that could come as soon as this month, the sources said. OGX said last week that management is considering all measures to protect assets and stay in business.
OGX sought out Goldman Sachs Group Inc, Barclays Plc and Credit Suisse Group to arrange a debtor-in-possession, or DIP, loan after failing to persuade bond and shareholders to fund the company until output starts at some of its fields, said the sources, who declined to be identified because the plans are private.
An OGX bankruptcy would lead to the largest-ever corporate debt default in Latin America, involving $3.6 billion of bonds, according to Thomson Reuters data. Once a Brazilian court accepts a filing, the company has 60 days to negotiate with creditors and present a corporate restructuring plan.
OGX missed a $44.5 million bond payment on Oct. 1 and said it would not use a 30-day grace period to honor the debt. Pacific Investment Management Co, known as Pimco, the world’s largest bond fund, and BlackRock Inc, the world’s biggest money manager, are among bondholders that stand to lose millions if OGX defaults.
Investors also worry that a lengthy legal battle is on the horizon in Brazil, where recent debt restructuring and bankruptcy proceedings have turned out badly for them.
The price on the OGX bond due in 2018 tumbled on Monday to an all-time-low of 6.125 cents on the dollar, down from 9 cents on Friday. Shares of OGX, which are down 96 percent over the past year, shed 13 percent to 0.20 reais in São Paulo, its lowest close.
OGX declined to comment. Repeated requests to Angra Partners, Blackstone Group and Lazard Ltd, OGX financial advisers, for comment were not answered.
Goldman, Credit Suisse and Barclays also declined to comment.
While DIP loans are common in the United States, the sources said bankers in New York are uneasy with the lack of precedent for such a structure in Brazil. In the United States, DIP loans are the first debt that gets repaid; as a result, such loans tend to be a regular feature of bankruptcy cases and are credited with saving companies and their employees from fire-sale liquidations.
DIP financing in Brazil has a very short history, with a recent case being that of meatpacker Independencia SA, which issued 261 million reais in DIP notes after filing for bankruptcy protection in 2009. The company was bought by JBS SA , the world’s biggest meatpacker, in January but the bankruptcy protection process has not been concluded yet.
Brazilian law does not grant DIP lenders the same protections as U.S. law and advisers have been forced to come up with creative workarounds to craft bankruptcy loans, said Bill Govier, an attorney with Lesnick Prince Pappas in Los Angeles and a specialist in Latin American restructuring.
“It’s tough being the guinea pig in these situations,” said one of the sources.
OGX is rapidly divesting assets, exiting exploration licenses and reducing capital spending to focus on the most profitable parts of its portfolio.
Batista, who just a year ago was Brazil’s richest man and the world’s seventh wealthiest with a fortune close to $35 billion, is dismantling his Grupo EBX conglomerate of mining, energy and logistics companies because of a dearth of cash, surging debt and a plunge in investor confidence.
OGX, Batista and creditors are currently in talks to stave off the collapse of the company, an event that could also bring down Batista-controlled shipbuilder OSX Brasil SA, which is owed payments for the oil output ships that it has built and leased to OGX.
OSX has been told it will not be paid for the ships, another source told Reuters. One of the sources said that, while OGX lacks the necessary assets to avoid bankruptcy, OSX could be saved.
Yet, traders said the price on the OSX bond due in 2015 fell to as low as 72 cents on the dollar, a record low, on concern the shipbuilder will be dragged into OGX’s bankruptcy.
The news for OGX, though, keeps getting worse. Last week, the company said it has certified reserves of 88 million barrels of oil in its Tubarão Martelo field northeast of Rio de Janeiro, less than a third of what it thought it would be able to produce from the area a year ago.
Brazil’s oil regulator also told Reuters on Monday that OGX will have to come up with new cash to develop three offshore fields the oil company considers uncommercial or lose them.
OGX said that there is a lack of suitable technology available to develop the fields economically and asked the ANP to extend the deadline for development. If the ANP had approved the deadline it could have kept the fields, possibly selling them to finance investment or pay debt.