OGX’s capital structure puts Brazil’s banks under scrutiny

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A common boast of Brazil’s banking sector during the country’s economic boom was their soundness, having experienced busts during previous periods of upheaval.

But what seems increasingly clear is that while they have been somewhat cautious with consumer debt, they and their international peers are set to face some hard questions when it comes to Brazilian billionaire Eike Batista’s “X” Group, particularly his oil flagship OGX.

“The market should have seen [this a] long time ago. This is the wrong capital structure for a company like this,” said Sam Aguirre of FTI Consulting Brasil, a corporate debt restructuring group.

He said an oil exploration company such as OGX would usually rely much more on equity than debt for its high-risk plans. “No one usually takes out that much debt to do a project of this sort. If it pays out, you are going to make zillions of dollars, but if it doesn’t you have no way to pay your creditors.”

The group had total gross debt of $13.1bn at the end of last year, according to JPMorgan. EBX, the holding company, is not listed but is 0.8 per cent owned by General Electric and 5.6 per cent by Gulf investment group Mubadala Development.

Bank of America Merrill Lynch estimates that the biggest creditors of the EBX group are BNDES, the Brazilian development bank, with R$4.89bn, state bank Caixa Econômica Federal with R$1.39bn and domestic private banks Itaú with R$1.24bn and Bradesco with R$1.25bn. Next in line is domestic investment bank BTG with R$649m and foreign banks such as HSBC with R$341m, Banco Santander with R$290m and Citi with R$206m.

“The exposures below are only a ‘partial’ view of the overall X-company exposure since EBX holdco is not listed and therefore does not disclose financial statements,” said Deutsche Bank.

However, JPMorgan estimates that EBX owes $1.3bn, though it is unclear to which banks. Moody’s, the rating agency, cut OGX’s credit rating on Tuesday by three notches to Caa2.

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