Out in the Atlantic Ocean, 130 miles off the coast of Brazil, an oil ship the length of New York City’s Chrysler building is at the center of an escalating legal war.

This battle pits the crude producer founded by Eike Batista, Brazil’s most notorious ex-billionaire, against bondholders who loaned another of his companies $500 million.

That company -- Batista’s shipbuilder, OSX Brasil SA -- lost the rights to the vessel when it defaulted on bonds in March after filing for bankruptcy protection in 2013. The default hasn’t stopped the oil company, known as OGpar, from continuing to pump oil -- free of charge. To bondholders who now own the rig, OGpar says: If you want it, come and get it.

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.

‘Pirates From Algeria’

“That’s the card OGpar is playing, and it explains why it’s not paying the daily rate to use the ship,” said Leonardo Theon de Moraes, a bankruptcy expert at Sao Paulo-based law firm Theon de Moraes & Demasi Sociedade de Advogados, which isn’t involved in the case. “Unless creditors send pirates from Algeria to go and get the vessel, the costs of executing the collateral are very high. OGpar is trying to gain time.”

That leaves bondholders stumped: They 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 on the OSX-3 floating production, storage and offloading -- or FPSO -- vessel, according to Thomas Felsberg, a lawyer for the Nordic Trustee AS, which represents creditors.

Legal ‘Abuse’

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.”

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.

Batista’s press representative didn’t reply to an e-mailed request for comment.Brazil’s real weakened 0.9 percent to 3.4536 per dollar Monday as of 2:39 p.m. in New York.

Only ‘Losers’

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.”

While Narcelio has dared bondholders to come and get the asset, both parties seem to agree this isn’t a solution -- at least not right now. Disconnecting and hauling away the 284,000-ton vessel would not only eliminate OGpar’s main source of revenue, it also would also cost millions of dollars and require approval from Brazil’s oil regulator and maybe even the Navy.

Pimco-Led Deal

Instead, OGpar has proposed that bondholders let the company use the ship as collateral in a partnership.

To complicate matters further, the legal battle threatens to derail a restructuring agreement that OGpar reached with its own spurned creditors.

A group of bondholders including Pacific Investment Management Co. agreed last year to inject fresh funds and convert debt into a controlling stake of OGpar. But the oil producer needs to resolve the conflict with OSX bondholders before the new shareholding structure can be set up, Narcelio said. OGpar and the Pimco-led group already missed one deadline in April to make the conversion.

Pimco declined to comment on OGpar bondholders’ negotiations with the company.

“The bondholders know of that leverage and that they have the power to hinder everything,” Narcelio said. “They are worse than vulture funds -- they are cowards.”

Source: www.bloomberg.com

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