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Analysis: As Batista renegotiates EBX debt, banks beat out bondholders

By Guillermo Parra-Bernal

SAO PAULO (Reuters) - The banks that financed the rise of billionaire Eike Batista's Grupo EBX are leading the struggling group's debt refinancing efforts and should be able to limit their potential losses. Bondholders, by contrast, could be left with very little.

Some of Brazil's biggest banks are refinancing maturing debt and stretching out debt repayments for the cash-strapped mining, logistics and energy conglomerate, a source with direct knowledge of the situation told Reuters. They have also been repaid some of the debt with proceeds from asset sales.

They are getting more collateral in the form of assets and additional stock, though they are not conceding any reduction in principal or interest on their loans, the source said.

The pressure exerted by state and private-sector banks on EBX will enable them to virtually eliminate any significant loss on their exposure to the struggling group, analysts and lawyers said. Analysts estimate the exposure to be between 15 billion reais ($6.7 billion) and 25 billion reais ($11.2 billion).

But bondholders including Pacific Investment Management Co., the world's largest bond fund company, could face hefty losses on their investments with Batista, who less than two years ago had the world's seventh-largest fortune, according to Thomson Reuters data.

As Batista sells assets in his struggle to save as much of his corporate empire as he can, he is prioritizing payments on billions of reais in secured bank loans over other types of debt, lawyers said.

That is already largely reflected in prices of bonds in companies controlled by his group. Bonds of OGX Petróleo e Gas Participações SA , Batista's debt-ridden oil company, are trading at about 16 percent of their face value.

"EBX and some of its six publicly listed entities and private ventures are going through an orderly liquidation likely driven by its largest banks, essentially to pay back senior bank lenders," Morgan Stanley & Co's credit trading desk analysts, led by José Kliksberg, wrote in a recent note.

EBX said in an e-mailed statement to Reuters that it recently ended a debt restructuring, without detailing whether it was with banks or other creditors. It did not respond to a question about whether the plan favored banks over bondholders. OGX has no plans to restructure its debt, a spokeswoman said in an e-mail.

Batista declined to be interviewed for this story.

In recent weeks, EBX-controlled OGX, shipbuilder OSX Brasil SA and logistics company LLX Logística SA have partially or fully repaid loans with Itaú Unibanco Holding SA and Banco Bradesco SA , fanning bondholder concerns that the commitments are coming at their expense.

Itaú and Bradesco declined to comment on their EBX exposure.

'BANKS BARK LOUDER'

Some in the market saw OGX's decision in June to pay OSX $449 million in compensation for the cancellation of some orders as a way to protect its local creditors, such as banks, while weakening OGX's ability to pay holders of its global bonds, said David Epstein, a managing director at research firm CRT Capital LLC.

Banks are moving ahead of other OSX creditors before attempts are made to reclaim possession of ships. In the event that OSX, which Batista created to build and lease ships to OGX, becomes insolvent, OGX could be forced to pay for the cost of building the ships, according to the prospectus for OSX's global bond sold in March last year.

"In Brazil, banks bark louder than other creditors do and they seem to bite harder," said a manager at a New York-based fund, which owns bonds in some EBX companies and declined to be named due to the sensitivity of the issue. "OGX is trading at levels that indicate a future (legal) claim."

Last week New York-based law firms Cleary Gottlieb Steen & Hamilton LLP and Bingham McCutchen LLP met with OGX and OSX bondholders to discuss the challenges that Brazil's insolvency law could pose in a default. Moody's Investors Service on Tuesday said current rules make recoveries in Brazil rather lengthy and tougher for some creditors.

Documents sent by the lawyers to some investors expressed concern that neither EBX nor any of its companies "engaged in discussions in spite of a series of dramatic announcements."

"Many bondholders are asking where is OGX's debt restructuring proposal," said Revisson Bonfim, a fixed-income analyst with Espírito Santo Investment Bank.

Pimco amassed a position in OGX bonds north of $450 million between October last year, when prices of the bond were near 88 percent of face value, and April, according to Thomson Reuters data. Pimco did not respond to repeated requests for comment.

BANK EXPOSURE

State development bank BNDES is EBX's largest creditor with 10.4 billion reais in commitments. A spokesman for Rio de Janeiro-based BNDES declined to comment.

Analysts estimate the combined loan exposure of Brazil's top four private-sector banks to EBX at about 5.1 billion reais. But that may be conservative, given poor disclosure and a lack of information on how much of that exposure is collateralized.

In the case of Brazil's private-sector banks, exposure to EBX is "limited," with potential credit-related losses weighing down earnings for a quarter or two in the worst-case scenario, UBS Securities strategist Philip Finch said in a recent note.

Finch said "most of the loans and financing are backed by guarantees, both cash as well as stocks of X companies," a reference to the X in the name of all Batista companies, which is supposed to symbolize the multiplication of wealth. "We recognize the recent devaluation of shares in EBX companies, but still, banks could be able to execute the cash guarantees."

OGX shares are down 88 percent this year through Tuesday, while those of OSX slumped 90 percent in the same period. LLX is down 69 percent.

While a default at one of the EBX units could hamper banks' profits, "that hit would be manageable as banks in Brazil are well capitalized," said Mario Pierry, head of equity research with Deutsche Bank Securities in São Paulo.

GOVERNMENT BAILOUT UNLIKELY

With a growing imbalance between assets and liabilities, dwindling cash and limited fundraising options, Batista is appealing to banks to avert the conglomerate's collapse, investors said.

To stay current on obligations, Batista is putting up for sale more of his remaining stake in mining company MMX Mineração e Metálicos SA , another source with knowledge of the company's situation told Reuters in late June.

Batista is in talks to sell the MMX stake to help repay $1 billion owed to Itaú and Bradesco, the source added. The proceeds, combined with money from the March sale of a stake in power producer MPX Energia SA , should be more than enough to cover those obligations, the source added.

Batista also cut debt to Abu Dhabi sovereign-wealth fund Mubadala Development Co to about $1.6 billion from about $2.3 billion, the same source said.

Yet the biggest challenge will be reorganizing OGX, which might not be able to support payments on $3.63 billion of bonds even after a radical downsizing, one of the sources said. OGX is slowing output at its only oil and gas producing field and scrapped three offshore projects that were consuming too much cash.

When all is said and done, Batista - who often boasted that he would become the world's richest man - will have a much more modest fortune and will likely live off dividends from some of the EBX companies that survive, one of the sources said.

(Editing by Todd Benson and Claudia Parsons)

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