By Peter Millard and Charles Mead
RIO DE JANEIRO – BlackRock Inc. has exited its actively managed positions in bonds of Eike Batista’s Oleo & Gas Participacoes SA as a lenders’ dispute jeopardizes the rescue of an energy company once worth $45 billion and now in bankruptcy.
BlackRock, which in August was one of the largest holders of OGP’s $2.56 billion face value of 8.5 percent bonds due June 2018, has sold its holdings, Brian Beades, a spokesman for the company, said by e-mail. BlackRock and Pacific Investment Management Co. were among investors that owned 55 percent of the debt in the business formerly known as OGX and negotiated a deal with Batista, the company’s founder and chairman, that would give them 65 percent of its equity.
The exit of the world’s biggest money manager from negotiations with Batista sends a signal of no confidence after minority lenders objected to the arrangement, threatening to delay about $200 million of debtor-in-possession financing that would allow OGP to present a restructuring plan to a court in its home city of Rio de Janeiro by Jan. 31.
“BlackRock did not think the prospects for putting more money in were good,” said Russell Dallen, the Miami-based head trader at Caracas Capital who took positions early last year that would profit from a drop in the price of the bonds. “They have a lot of energy expertise.”
The company is negotiating with the country’s oil regulator to show it has the financial strength to operate a petroleum field 95 kilometers (59 miles) off the Rio coast, its only source of revenue for at least the next year.BlackRock Holdings
Beades declined to provide details of BlackRock’s strategy beyond the statement. OGP declined to comment on BlackRock’s decision to sell the debt in an e-mailed response. The company expects to reach an agreement with bondholders by Jan. 31 after missing a Jan. 24 deadline, according to a regulatory filing.
About 25 BlackRock funds owned the company’s bonds with a face value of $300 million, according to Bloomberg calculations based on data available in July 2012. Regulatory filings from February to April show that had fallen to about six funds holding approximately $70 million. As of October, only the BlackRock Global Allocation Fund, which seeks to invest in undervalued securities, owned the bonds, with about $179 million of face value of the issue due in June 2018, according to data compiled by Bloomberg.
OGX, which hasn’t posted a profit since the second quarter of 2010, surged in value in 2009 and 2010 after reporting discoveries at more than 80 percent of wells drilled, allowing Batista to tap debt markets to finance operations. Shares then crashed 68 percent in 2012 and 95 percent last year after the company missed production targets and abandoned fields it previously declared commercially viable.Agreement Terms
Under the agreement, the group that previously included BlackRock will commit about $200 million in the form of DIP financing in exchange for shares of the post-bankruptcy company in a debt-for-equity swap. Bondholders not involved in the financing deal and other creditors will get a 25 percent stake.
McDermott Will & Emery LLP is organizing a group to represent minority creditors after the investors were left out of the reorganization talks. The Chicago-based law firm didn’t immediately provide comment when contacted by telephone.
Varun Gosain, a partner at New York-based Constellation Capital Management, an OGP creditor, said Jan. 16 that the agreement was unfair to investors that weren’t part of the discussions to provide financing.‘It’s Inevitable’
“It’s the nature of the beast, you’re going to have majority bondholders in one situation, and minority bondholders doing what they can,” said Gianna Bern, a former senior director at Fitch Ratings who is now president of Chicago-based risk-management adviser Brookshire Advisory & Research. “It’s inevitable to get these types of situations that need to be reconciled and have the propensity to delay progress.”
The DIP loans are aimed to keep crude flowing at Tubarao Martelo, the company’s only producing asset after it agreed in October to sell control of its natural-gas fields to private-equity fund Cambuhy Investimentos Ltda and Germany’s EON SE. Martelo produced about $32 million worth of oil last month after starting output on Dec. 6.
The compartmentalized geology that led to the failure to sustain output at Tubarao Azul may also be present at Tubarao Martelo, Dallen said.Output Drop
Initial production at Azul came in strong, and then rates faded after several months and all three wells at the field are currently shut. Martelo is in the same part of the Campos Basin with similar geology to the Azul field.
OGP bought exploration licenses by itself in a region dominated by Petroleo Brasileiro SA and other major oil companies that have the financial resources to survive exploration setbacks.
“Tubarao Martelo may not be able to support long-term production,” Dallen said. “There is some pessimism that ultimately the $200 million raised in new funds might not be enough to carry OGX till the company is self-sufficient and that they might again have to tap investors to raise more money in the summer when the coffers are running low again.” Bloomberg