By Shamaila Khan of AllianceBernstein
Emerging market corporate debt has returned big numbers for investors in recent years, as the sector rode a general wave of optimism. But those days are gone. In 2013, successful investors have had to take a more painstaking path.
This year, investors have succeeded by making careful decisions on securities only after scrutinising balance sheets and management teams, and identifying pockets of opportunity—while avoiding defaults. Latin America showcases the point. Default rates there have been very high (see chart below) but investors who avoided the region altogether missed out on some great opportunities. The problems weren’t systemic – they were idiosyncratic.
The week in emerging markets, including our most read, five things we have learned and some long reads for the weekend. Plus the week in a chart: Batista’s OGX files for bankruptcy.
By Samantha Pearson and Pan Kwan Yuk
It’s the end of an era for Brazil’s Eike Batista – the end of charming investors with dazzling oil forecasts, the end of being the poster boy for Brazil’s economic promise and perhaps even the end of parking his sports car in his living room.
Batista’s oil company OGX finally filed for bankruptcy protection on Wednesday, triggering Latin America’s largest ever corporate default.
In the world’s list of exciting jobs, you would think one company would hardly qualify – OGX, the flagship oil company of Brazilian tycoon Eike Batista that has just two days to meet a debt payment or trigger Latin America’s biggest default.
Yet OGX is still hiring and firing. What’s more amazing still, people are stepping up to accept the new jobs. The same day that OGX announced its voluntary debt restructuring talks with creditors had collapsed, it said it was appointing a new director of exploration, Gilberto Carvalho Lima.
It’s not just bondholders and shareholders who are reeling from the financial collapse of Brazilian tycoon Eike Batista’s flagship oil company OGX.
With OGX revealing on Tuesday that it has cut payments to all but the most “critical” vendors for Tubarão Martelo – its most promising oil field and possibly its last hope of making money – suppliers are also quickly racking up losses.
Even in the worst of circumstances, it seems Eike Batista’s oil exploration startup, OGX, retains some of the former pluckiness of its once super-rich entrepreneur founder.
The company announced on Tuesday that finally the moment the market has been expecting for months had come – it was going to miss an interest payment.
OGX shareholders should be used to violent swings in the market by now. Shares in Eike Batista’s oil company are down more than 90 per cent this year. However, even by OGX standards, the last few days have been a rollercoaster for investors.
The stock gained as much as 49 per cent on Friday after OGX exercised a put option under which Batista would begin to pump as much as $1bn into the company through the purchase of new shares. On Monday shares fell over 17 per cent after Batista contested the decision to exercise the put.
Cade, Brazil’s antitrust regulator, has this week revealed it is investigating the purchase of Petrobras’s 40 per cent stake in the BS-4 oil block by Batista’s oil company OGX last November.
They suspect OGX and Petrobras may have closed the $270m deal for the block in Brazil’s Santos Basin without the prior approval of the antitrust regulator.
Cade has 30 days to decide whether they have broken the law – if found guilty, the companies could be fined up to R$60m each and the transaction may be “annulled”. They may also be subject to further penalties.
Some damning number crunching over at Bloomberg on Eike Batista’s net worth.
According to the report, Batista – who famously boasted that he would overtake Mexico’s Carlos Slim to become the world’s richest man by 2015 – currently has a net worth of just $200m.
Granted, that is still an awful lot of dosh for mere mortals like you and this beyondbrics reporter. But for Batista, whose fortune peaked at $34.5bn just 16 months ago, the collapse of his wealth caps a dramatic fall from grace.
It’s a sure sign of just how desperate investors in Eike Batista’s companies have become.
Shares in MMX, LLX and OGX (Batista’s mining, logistics and oil companies) were among the top five gainers on Brazil’s stock market on Tuesday on talk about who, in theory, might be interested in buying their assets.
After months of silence, Eike Batista has finally given a public response to the recent crisis across his business empire, publishing an open letter on Friday in local newspapers Valor Econômico and O Globo.
The letter was published in Portuguese and, according to his EBX group, there are no plans to release a version in English. But beyondbrics believes foreign investors also deserve an explanation and has done him the favour of translating the letter:
A report in Valor Econômico on Thursday makes joyous reading for the bankers of struggling tycoon Eike Batista and represents the portents of doom for original holders of his international bonds.
Apparently, Batista and BTG Pactual, the Brazilian investment bank controlled by Andre Esteves, have cooked up a restructuring plan in which the billionaire will reduce his stakes in his more valuable companies to become a minority shareholder.
Brazil’s government will not come to the aid of Eike Batista, the would-be world’s richest man whose fortune has evaporated and whose natural resource companies are raising alarm bells about their ability to meet their obligations.
Edison Lobão, mines and energy minister (pictured), told journalists late on Wednesday the government had no plans to offer help to Batista’s EBX Group. Asked if any such aid might emerge, he said succinctly, “No.”
OGX, Eike Batista’s start-up oil company and the supposed crown jewel in the Brazilian billionaire’s empire, is in plenty of trouble.
Having seen its share and bond prices collapse over the past year after it repeatedly missed production targets, the company is now fighting for survival following the shock news on Monday that its only oil-producing wells would probably be closed down next year.
Just how bad are things exactly? Marcus Sequeira over at Deutsche Bank thinks OGX could run out of cash as early as Q3 this year, while analysts at Banco Santander and Credit Suisse reckon there is little or no value left for shareholders. More ominously, the words “distressed” and “debt restructuring” are being bandied around with increasing frequency in conversations about the company.
Is this beginning of the end for Eike Batista?
Having raised billions for his conglomerate of start-ups from investors keen to partake in Brazil’s growth story, Batista’s empire has been slowly unraveling over the past 12 months after his flagship oil company OGX repeatedly missed production targets.
The crisis of confidence that has gripped his companies kicked up another notch on Monday after OGX dropped yet another bombshell - its only oil producing wells would probably cease production next year. The company also said it was shutting down three offshore projects.