Brazilian oil and gas company OGX earned the dubious distinction of becoming the largest bankruptcy filing in the Latin world Wednesday after it failed to reach a deal with secured creditors.
OGX reportedly needed upwards of a half-billion dollars to stay out of insolvency, and the company’s once brazen leader Eike Batista apparently tried to negotiate for a little more of half of that amount from creditors with no success. The record filing was not a surprise even before the former giant missed debt payments a month ago or since it predicted publicly this week that it would likely run out of money before 2014 hits.
The filing is significant not just because of its size. The fall from grace of OGX is similar in some ways to the decline from Brazil’s hot economic growth at the beginning of the decade that earned labels like “the Pearl of Latin America” and a power position within the powerful BRICs bloc with other emerging economies Russia, India and China. Now, both secured and especially unsecured creditors are expected to take on massive losses, even if its debt restructuring plan is ultimately successful and leads to a prosperous OGX rebound. Even with a plan filing due within 60 days, Brazil has a notoriously poor reputation for speed of bankruptcy proceedings compared to other nations or for hope of a creditor-friendly recovery.
To wit, Brazil’s Business Restructure Law (Law 11.101) that was enacted in 2005 gave a lot more leverage and leeway in paying off debt following insolvency problems. The periods in which they can pay, judging from an increasing number of cases since them, can be stretched for many years.
“The law there is terrible to the creditors,” said Octavio Aronis, an attorney at Brazilian firm Aronis Advogados, in a spring 2013 interview with NACM. “The Brazilian version of Chapter 11 can go on for 10 or 15 or 20 years. It’s hard for international clients to understand that. Can you imagine how hard it is to explain to those who have $1 million owed to them, and have to tell them they may receive that in 20 years?” Aronis, who is the speaker in an upcoming FCIB webinar on “Doing Business in Brazil,” added that the best course of action often is agreeing to take something like 40%, for example, or even less in the near-term rather than holding out for a better payout that could come in years or decades later. As such, this bankruptcy could serve as a giant reminder of the importance of knowing the health of a customer in Brazil as well as the potential of using more restrictive terms or credit insurance to reduce risk.
- Brian Shappell, CBA, CICP, NACM staff writer