“It is a sad story,” Arthur Byrnes, a managing director at Deltec Asset Management in New York says of Brazilian industrialist Eike Batista’s spectacular fall from grace.
“In one way, Mr Batista had a lot going for him and was the type of person who could do good things for Brazil in terms of infrastructure and fostering private sector competition. Instead, it all blew up.”
After months of restructuring talks, the former billionaire’s flagship oil company OGX said on Tuesday that negotiations with holders of its $3.6bn in bonds had ended with no agreement. On Wednesday, Rio de Janeiro-based OGX filed for protection against its creditors in one of the largest corporate bankruptcies in Latin America.
In Brazil, Mr Batista’s creditors and business partners have been scrambling to protect their interests in the event of bankruptcy. Yet back in the US and Europe, investors in Latin American fixed income assets are left with another question: Will the sinking of Mr Batista’s empire drag with it other corporate bonds in the region?
In the market for Latin American corporate bonds in the past decade, blow-ups like Mr Batista’s OGX have been few and far between. Their arrival has been well telegraphed and their impact so localised that when headlines such as those on Tuesday cause a sell-off, corporate debt in the region has been even more likely to offer rewards for buyers with a long-term investment horizon.
But the past year has been different. Latin American bonds have been under pressure amid a broader sell-off in emerging markets in anticipation of the end of the Federal Reserve’s stimulus programme.
Corporate defaults have spiked throughout the region, with a couple of high-profile cases among Mexican homebuilders. Brazil, in particular, faced a troika of bad news in the form of a slowing economy, higher inflation and a wave of protests. As a result, prices fell and the performance has lagged behind that of emerging market peers.
As of Tuesday, high-grade Latin American corporate debt had accumulated negative returns of 3.3 per cent this year, compared with a negative 1 per cent for broad emerging markets bonds of similar ratings, according to JPMorgan Indices.
Far from putting people off, though, the combination of lower prices and the OGX bankruptcy filing may attract a new wave of buyers, traders and investors said.
“The issue with OGX, as unfortunate as it is, has been dragging for quite some time now,” says the head trader for Latin American bonds at one big US bank. “Now we all know how this story ends. It’s almost like a clean slate for Latam bonds. People can finally move on.”
Daniel Shirai, a bond trader at Brasil Plural in New York, agrees. “If anything we have seen a rebound in Latin American corporate bonds in the past weeks,” he says. “The situation with OGX was well telegraphed and most dedicated investors know that the troubles with the company were very specific, and not an indication of broad systemic risk.”
OGX missed a $45m payment on its bonds at the beginning of this month and was granted 30 days’ grace to negotiate with creditors, which was set to expire on Thursday.
Latin American corporate bonds have rallied in the past month, helped in part by the Fed’s decision to postpone the tapering of its stimulus programme. Average yields on high-grade bonds fell 57 basis points in that period to stand at 5.44 per cent on Tuesday, according to JPMorgan.
“Throughout this process, the top corporations in Brazil, Colombia, Peru were able to borrow money and they always will,” says Mr Byrnes at Deltec.
Indeed, the sell-off in emerging markets earlier this year, the lacklustre returns and even the looming bankruptcy have not deterred Latin American companies from raising record amounts in dollars this year.
New debt offerings from companies such as Brazil’s Petrobras, Mexico’s Pemex and Chile’s state-owned copper producer Codelco, helped push this year’s dollar issuance to a record $82.5bn, according to Dealogic. The amount is 4 per cent higher than the volume sold in the same period to the end of October 2012, and shows little signs of abating in the next couple of months.
Still, investors should not discount the lessons provided by OGX’s demise, says Michael Roche, an emerging-markets strategist at Seaport Group.
“In hindsight, bond investors were premature in extending capital to the company. There was also quite a degree of opaqueness in dealings with investors and not all numbers were clear,” he says. “The problem is, markets have short term memory. We have to assume mistakes will be made again.”
Additional reporting by Joseph Leahy in São Paulo