On October 30, 2013, Brazilian oil company OGX Petróleo e Gas Participações SA (OGX) filed for bankruptcy protection (or "judicial reorganization") in Rio de Janeiro after restructuring discussions between the company and its major creditors ended without agreement. With nearly $5 billion of debt, OGX is the largest and most complex bankruptcy proceeding to be conducted in Latin America and will not only test Brazil's nascent bankruptcy law, but also presents itself as the latest potential opportunity for distressed investors focused on Latin American emerging markets.
OGX values itself between $2.4–$2.7 billion, with liabilities between $5.1–$6.8 billion. Its largest single creditor is its sister company, OSX Brasil SA (OSX), a shipyard and ship-leasing company, which claims it is owed at least $1.1 billion (representing approximately 21 percent of OGX's obligations). Despite currently low expected recoveries for unsecured creditors, there still exists substantial opportunity to uncover value in the company's distressed debt and trade claims. OGX's creditor list contains upwards of 250 creditors, including major companies such as Diamond Offshore Drilling, a Houston-based drill-rig operator; Ensco, Inc., a London-based drill-rig operator; and General Electric. The company's largest bondholders (with a total of $3.6 billion outstanding), are led by PIMCO and BlackRock.
The current Brazilian Bankruptcy Law (No. 11101/05) (BBL) was enacted in 2005 for the purpose of increasing the effectiveness and efficiency of judicial reorganization and liquidation proceedings in Brazil. Inspired by Chapter 11 of the US Bankruptcy Code, the BBL was designed to remedy Brazil's prior insolvency system, which was widely regarded as heavily anti-creditor and resulted in creditors demanding exorbitant interest rates from Brazilian borrowers to offset their dismal bankruptcy recovery risk.
Due to its magnitude and intertwined corporate structure (i.e., OSX is not only OGX's largest creditor, but is also expected to file its own bankruptcy petition next week), OGX and OSX's insolvency proceedings will certainly test the competence and efficacy of Brazil's eight-year-old judicial reorganization process. If administered properly, OGX's reorganization can offer the struggling company a chance to reduce its liabilities and to emerge as a going concern. However, if the plan is not timely approved by creditors, under the BBL, the case will automatically convert into a liquidation.
Although the BBL was modeled after the US Bankruptcy Code, a number of important differences do exist, with significant implications for bankruptcy claim traders. When compared against common US Bankruptcy Code provisions, there are critical issues that claim traders must be mindful of when investing in OGX, including (i) the ranking of unsecured claims, (ii) treatment of executory contracts, (iii) timing of voidable transfers, (iv) the key parties and timeline for effectuating a plan of reorganization under the BBL (a Plan) and (v) the consequence of not timely agreeing to a Plan.
Below is a comparative list highlighting some of the relevant differences between the US Chapter 11 process and Brazilian judicial reorganization which may be of concern to investors seeking to invest in OGX distressed bonds and/or claims.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
