Sometimes it’s not worth it for creditors to seize collateral when a deal goes bad.
Just ask Deutsche Bank, or any of the other investment banks which would have been forced to book billions in mark-to-market losses on Canadian asset-backed commercial paper deals gone bad in 2007 had they chosen to collect the available collateral and cancel their swaps rather than negotiate a restructuring.
Or you could ask OSX Brasil SA bondholders who are technically entitled to take possession of an oil ship the size of the Chrysler building which is currently sitting 130 miles off Brazil’s coast.
As Bloomberg explains, OSX effectively forfeited its claim on the ship when the company – part of former billionaire Eike Batista’s crumbled empire – defaulted in March, giving creditors the option to sail out and tow the vessel in.
The issue, of course, is that there are significant logistical problems associated with repossessing a giant oil ship and while creditors work on figuring those problems out, OGpar (another Batista venture) is still pumping 10,000 barrels of oil a day, because…well…because why not if no one is going to come and stop you.
To add insult to injury, OGpar is refusing to pay the nearly $300,000/day rental fee to use the vessel, money which, considering OSX is bankrupt, presumably also belongs to creditors. Here’s more from Bloomberg:
The clash is the latest chapter in the saga of Brazil’s once-richest man, an investor-darling-turned-pariah who sold shares in six companies in a span of six years and lost more than $30 billion even faster when his commodities and energy empire collapsed. It’s also a cautionary tale for Brazilian creditors, whose claims can get tied up for years and even decades in the nation’s maze-like legal system.
[Bondholders] could try to seize the ship, but only if a court and the government approves. And the tumble in crude prices means the vessel isn’t worth what they’re owed, anyway. They could leave the rig to OGpar while waiting for asset prices to rebound, but the oil producer is refusing to pay rental fees of as much as $265,000 a day.
OSX’s bondholders — including Redwood Capital Management LLC, DW Partners LP and Rimrock Capital Management LLC — are asking a Brazilian court to make OGpar pay $70 million in past-due fees.
Batista and OgPar and OSX’s management “are doing what they can to abuse the Brazilian legal system to prevent investors from being paid what they are owed,” said Ruben Kliksberg, a partner at hedge fund Redwood Capital. Batista and the management teams, as well as courts, “are having a material impact on the reputation of Brazil as a foreign investment jurisdiction.”
Maybe so, but as OGpar CEO Paulo Narcelio will patiently explain to you, the company (which is also bankrupt) is trying to squeeze out a living here, and if it is forced to pay the money it owes, then the offshore oil operation that it shouldn’t be allowed to run in the first place will cease to be economically viable.
OGpar Chief Executive Officer Paulo Narcelio said paying the $70 million could force the Rio de Janeiro-based company to shut down and liquidate. OGPar also has been operating under bankruptcy protection since 2013.
The oil company is producing only about 10,000 barrels a day — about 10 percent of capacity — from the vessel in Brazil’s offshore Tubarao Martelo field. Paying the full daily rate would make the operation unprofitable, Narcelio said.
“There will only be losers if they keep insisting,” Narcelio said in an interview in Rio de Janeiro. “It’s stupidity. They’re portfolio-management kids just out of college, and they think they’re powerful.”
Yes, these newly graduated greenhorns were under the mistaken impression that the bond covenants represented legally-binding agreements between creditors and borrowers (thanks a lot undergrad finance professors). What these “kids” don’t understand is that in a world ruled by debt, “insisting” that people pay back what they borrowed produces nothing but “losers.”
You know, it’s the old “if I owe you a dollar that’s my problem, but if I owe you a 1,000 foot oil ship, that’s your problem” argument – or something.
As Bloomberg goes on to note, “disconnecting and hauling away the 284,000-ton vessel would cost millions of dollars and require approval from Brazil’s oil regulator and maybe even the Navy,” meaning there aren’t really any good options here for the bondholders.
Well, that’s not entirely true.
Leonardo Theon de Moraes, a bankruptcy expert in Sao Paulo who spoke to Bloomberg did say that there was one possibly cheaper alternative creditors could pursue:
“The costs of executing the collateral are very high unless creditors send pirates from Algeria to go and get the vessel.”
