MAC: Mines and Communities

Brazilian billionaire Eike Batista drowning in debt

Published by MAC on 2013-07-09
Source: Reuters (2013-06-28)

How The Brazilian Billionaire Who Wanted To Be The World's Richest Man Saw His Fortune Sink Under A Massive Pile Of Debt

Reuters

28 June 2013

SAO JOÃO DA BARRA, Brazil - As Brazilian billionaire Eike Batista's EBX industrial empire crumbles, it increasingly resembles his most visible accomplishment, the Port of Açu.

In other words, a pile of sand in the middle of a swamp.

To build the $2 billion iron ore and oil terminal, shipyard and industrial park 300 kilometers (190 miles) north of Rio de Janeiro, the world's largest dredging ship cut through the beach and dug 13 kilometers (8 miles) of docks out of dune and marsh. To keep tenants dry, the sandy waste is being piled as much as 5 meters over the surrounding flood plain.

The complex, one and a half times the size of Manhattan, has another 3-kilometer pier that can dock half a dozen of the world's largest tankers and freighters at the same time.

Yet despite all that work, in a country desperate for ports and other heavy infrastructure, investors consider the three EBX companies with stakes in Açu's success nearly worthless.

All but one of EBX's six traded companies has lost more than 90 percent of their value compared with record highs, and the bonds of oil company OGX Petroleo e Gas SA, EBX's flagship unit, are trading at levels that suggest default is imminent.

Batista, one of Brazil's most successful entrepreneurs during a decade-long commodities boom, has had to watch one of the world's largest fortunes disappear. Only last year, when Forbes ranked his fortune the world's seventh biggest, he boasted he would become the world's richest man.

Brazil, which during the boom grew at its fastest pace in three decades, has stagnated. Talk of a "Brazilian miracle" has been replaced by nationwide street protests against corruption.

Batista's personal fortune has shrunk by more than $20 billion, knocking him from the top of Brazil's wealth list and making him a merely average billionaire.

"Batista's situation is pretty awesome in the true sense of the word," said Chris Kettenmann, oil and gas analyst with Prime Executions, a New York stock brokerage. "It's spectacular to see how much value has been eroded."

The EBX ventures in oil, shipbuilding, energy and transportation may survive in a slimmed-down form. Batista, though, is unlikely to control them, being forced instead to sell his stakes to pay debt.

Batista is looking for buyers for all or part of his 27 percent stake in MMX Mineracao e Metálicos SA, his iron ore mining company, as well as in his 62 percent stake in coal company CCX Carvão da Colombia SA, a source linked to the EBX Group told Reuters on Tuesday.

He's also trying to sell his privately held AUX gold mining company, the source said.

On Tuesday, Brazil's Valor Economico daily newspaper said Glencore Xstrata Plc and Brazilian investment bank BTG Pactual SAwere considering a bid for Batista's stake in MMX. The Folha de S.Paulo newspaper said Dutch transportation and logistics company Trafigura Beheer BVwas doing due diligence for a possible bid. Neither paper named the source of their reports.

EBX turned down requests to interview Batista and other group executives.

Synergies Become Liabilities

In the past year the "synergies" and financial links between EBX companies that helped Batista sell about $7 billion of stock to minority investors since 2006 became liabilities.

In June 2012, oil company OGX revealed output from its first field was lower than expected, raising concern that OSX Brasil SA'sshipyard would get fewer orders from OGX, its main client.

As OSX is an anchor tenant at Açu, owned by EBX's LLX Logistica SA, LLX stock also fell.

And the dominoes keep falling, thanks in part to high debt levels at EBX companies and a lack of transparency in deals with Batista's personal holding company, Centennial Investments.

While Batista has offered to buy more OSX and OGX stock to calm minority investors, he also has brought in outside help.

In March 2012, Batista sold 5.63 percent of Centennial to Mubadala Development Corp., the Abu Dhabi sovereign wealth fund, for $2 billion.

What Batista didn't say at the time was that he agreed to give up an unspecified stake in EBX to Mubadala if its investment in Centennial didn't provide a 5 percent annual return, a report by Bloomberg News said in December.

Since then, speculation mounted that Batista is struggling to meet the Mubadala terms as well as those of his own bankers.

Batista's Centennial also sold 0.8 percent to General Electric in May 2012. Mubadala owns a GE stake.

Doubts about Debt

In the face of such doubt, not even the injection of more than $1 billion in rescue capital from Malaysian oil company Petronasin May, and in March from German utility E.ON SEand fellow Brazilian billionaire Andre Esteves' investment bank, BTG Pactual, halted EBX's slide.

Batista's debt, or "leverage," is high, said Frank Holmes, chief executive of U.S. Global Investors of San Antonio, Texas, who has known Batista since the late 1980s.

At the end of March, long-term debt levels at OGX, MPX, OSX and LLX, which owns Açu, were more than three times the median levels for similar companies and a third to a fifth of each company's total capital. These levels imply high risk.

With no positive cash flow and no profit, paying debt requires EBX companies to spend cash that would be better used to complete projects and boost revenue. State development bank BNDESand Brazil's Merchant Marine Fund have lent or offered loans to EBX. They might step in to protect their investment, but the revenue stream promised to pay debts has been delayed by Brazilian bureaucracy and Batista's own management failures.

"The guy leveraged everything, and the bankers and everyone else believed in his vision. It's easy to do this," Holmes said.

Now those believers aren't so sure.

Since March, OGX bonds due in 2018 and 2022 have steadily lost value. Starting June 5, they plunged to less than a third of face value, a level signaling increasing chances of a default.

In May, Batista sold 70.5 million shares in OGX for $57 million, cutting his stake to 59 percent from 61 percent, selling for less than a third of what he has promised to pay for new shares.

This promise, known as a put option, requires Batista to buy up to $1 billion of OGX stock at 6.30 reais a share by April 30, 2014 if the OGX board thinks it is needed.

Board Members Quit

Fitch Rating Service almost immediately downgraded the debt of OGX to "CCC," meaning it is at high risk of default. Selling stock below the put price raised speculation Batista doesn't have the cash to honor his promise.

"The rating downgrades reflect increased uncertainty about the willingness and ability of OGX controlling shareholder Mr. Eike Batista to honor the company's $1 billion put option," Fitch wrote. "Funding for OGX's capex program is vital to increasing oil production, so a default on the put option would further tighten the company's liquidity position."

A week after the downgrade, three OGX board members who would decide if OSX needed the cash from Batista's put option quit. The high-profile trio rank among Brazil's most respected financial, political and legal leaders: Pedro Malan, a former long-serving Brazilian finance minister; Rodolfo Tourinho, a former energy minister; and Ellen Gracie, a former chief justice of Brazil's Supreme Court.

Vision without execution

Batista, though, is honoring another put option. In October he agreed to supply up to $1 billion to shipbuilder OSX by March 23, 2014. On Tuesday he bought 183 million reais ($81.1 million) of OSX stock, two-thirds of the $120 million requested in May.

He must give minority investors until July 2 to buy up a lot of shares equal to half his purchase, but buyers are unlikely. Batista paid 40.14 reais a share and OSX closed Tuesday at 1.36 reais, meaning Batista will have to come up with about 60 million reais more, based on the deal's exchange rate.

Holmes believes Batista's problem is primarily one of management. A decade ago similar missteps forced Batista to sell TVX Gold to Kinross Gold Corp. after promising gold projects in Russia and Greece wound up in court.

"I really respect Eike as a visionary entrepreneur, a trailblazer. He's not a cheat, he's not a liar," Holmes said. "Where the screw-up is, is the execution."

Indeed, nearly all top managers at EBX Companies have changed in the last year. And he's faced lawsuits from at last one former chief executive.

"There's an old expression," Holmes said. "'If you don't execute, Mr. Market will execute you.'"

Holmes, who never bought EBX Group shares because he considered them too expensive, said EBX prices have now fallen so far that it may be time for another look.

Back at Açu, Batista's problems continue. OSX, the shipbuilder, may have failed to make a 500 million real ($222 million) payment to Spain's Acciona, a contractor at the site, local paper Folha de S.Paulo reported. OGX denied the report on Monday.

"I don't know what will happen to Batista," Julio Bueno, the Rio de Janeiro state secretary for economic development whose government has helped him expropriate land for the port, said in an interview. "We need the port, and other investors want to build ports nearby. Will the port still get built? Yes. Is it a good idea? Yes. Will Batista own it? That I can't say."

($1 = 2.22 Brazilian reais)

(Additional reporting by Herb Lash in New York and Guillermo Parra-Bernal in Sao Paulo and Sabrina Lorenzi in Rio de Janeiro; Editing by Todd Benson and Douglas Royalty)


Insight: Ecological risks may spell trouble for Batista's Brazil port

Jeb Blount

PlanetArk

12 July 2013

SÃO JOÃO DA BARRA, Brazil - As Brazilian billionaire Eike Batista breaks up his crumbling EBX Group industrial empire to pay off debt, one of the few assets he's expected to keep is port-development company LLX Logística SA.

But raising the more than $600 million needed to finish LLX's only project, the massive $2 billion Port of Açu north of Rio de Janeiro, may be a struggle. One-and-a-half times the size of Manhattan, Açu is designed to ease delays caused by Brazil's overcrowded ports and serve a booming offshore oil industry. It's also being dogged by scientists' claims that its construction is polluting the surrounding lowlands ecosystem with salt.

Raising money for anything associated with Batista, a serial entrepreneur who once boasted he would become the world's richest man, won't be easy. Since 2010, he has presided over the loss of $50 billion of shareholder value in EBX Group stock. EBX controls LLX and five other traded companies, all branded by Batista with an "X" to signify "the multiplication of wealth."

And while there are strong business reasons to invest in a giant port that eases some of the transportation bottlenecks holding back Brazil's commodities-led exports, some investors may not want exposure to a company facing possible ecological liabilities and potentially costly lawsuits.

Eduardo Santos de Oliveira, an aggressive federal prosecutor, has already launched a case against the port to determine civil liability for alleged environmental damage. Oliveira, the prosecutor in Campos de Goytacazes, the largest city near the port, has previously drawn global attention for launching Brazil's largest-ever environmental lawsuit.

That case sought nearly $20 billion from Chevron Corp and rig contractor Transocean Ltd over an 2011 oil spill. And while criminal charges were eventually dropped in February, and actual civil damages are expected to be a tiny fraction of Oliveira's request, the case sent a chill through the entire Brazilian oil industry.

"I am by no means an environmental specialist," said Will Landers, who manages $6.5 billion of Latin American investments for Blackrock Inc, the world's largest asset manager. "But the fact that you need to be one to invest in this type of project should limit significantly the pool of investors that may one day be willing to entertain giving fresh capital to any company from the EBX group" the São Paulo-born Landers said.

How much environmental damage has occurred is a matter of fierce debate. Officials for LLX and OSX Brasil SA - the EBX company building a shipyard at the port - deny that a "temporary" leak of salt-water into surrounding marshes in late 2012 caused lasting ecological harm to the delta of the Paraíba do Sul River, one of the last large, undeveloped coastal lowlands on Brazil's southeast coast.

Yet scientists at Northern Rio de Janeiro-State University (UENF) in Campos de Goytacazes, a 40-minute drive from Açu, say there is growing evidence that the port's construction threatens a sensitive ecosystem.

While the UENF researchers are careful to say they don't have conclusive proof of long-term damage, they say Açu's surrounding marshes, pastures, lagoons and fields, along with crops and cattle, face a serious threat.

"Preliminary data show salinity could lead to the permanent contamination of the soil," said Carlos Rezende, professor of bio-geochemistry and ecology at UENF. "We also have anecdotal evidence that the ecosystem around Açu is being harmed."

LLX and OSX declined to make Batista or other senior executives available for interviews about the port or the salinity issue.

UENF, LLX, OSX and INEA, Rio de Janeiro's state environmental protection agency agree on at least one point: that water in the Quitingute Channel, which gets run-off from the port, became brackish, or partly salty, in late 2012, documents in the court case show. The salination began after the world's largest dredging ship began digging up beach, dunes and marsh to build 13 kilometers (8 miles) of docks and ship channels.

The salt came from dredging waste saturated with sea water. Deposited in dumps to dry, the sandy soil was then spread on the surrounding lowlands, raising the land as much as 5 meters (16 feet) above the floodplain, Ivo Dworschack, the manager of the OSX shipyard said during a March visit.

"Based on statements presented by INEA, LLX and OSX is it incontrovertible that there was an increase in the salinity of the Quitingute Channel as a result of that (dredging) work," Federal Judge Vinícius Vieira Indarte wrote in a February 15 ruling.

The ruling on prosecutor Oliveira's initial filing accepted that the court had grounds to rule on the case and that the prosecutor had grounds to investigate potential civil liability for salination. The judge, though, denied Oliveira's request to stop work at the port.

The port's iron ore terminal, part owned by global miner Anglo American Plc. and the OSX shipyard were supposed to be open by now. Most things at LLX are months or years behind schedule. Some companies who had planned to build facilities within the complex, such as China's Wuhan Iron and Steel Co, have pulled out.

OSX, once expected to be LLX's biggest tenant, will likely be restructured as part of Batista's efforts to slim down the EBX group and pay down debt, selling the vessels owned by its ship leasing business and shuttering the yard before it has built a single ship, a source with knowledge of Batista's plans told Reuters. EBX declined to comment on the restructuring plans.

Salt is 'Forever'

The leak was serious enough for INEA on February 1 to levy more than 3.3 million reais ($1.45 million) of fines on OSX. INEA said levels in the Quitingute Channel were four times higher than those in fresh water. They've since returned to normal, INEA said in an e-mail.

INEA ordered compensation for farmers, credited UENF with alerting it to the problem and promised a joint INEA-UENF study. It did not explain why it fined OSX and not LLX. OSX is appealing the fine.

The study, though, was never done, and farmers have not been compensated, and salt levels are not normal in the Channel, Rezende's group at UENF said.

On January 29, Rezende's colleague Marina Satika Suzuki, a professor of inland-water-studies, measured salt levels at nearly 16 times the level Brazil's agricultural research agency, Embrapa, considers safe for irrigation. Levels above the limit can permanently damage farmland.

On May 14, those levels were still nearly 6 times higher.

"What does permanent salt build-up mean?" Suzuki asked. "Have you heard of Carthage? The Romans salted the land and destroyed the agriculture. If salt levels are high enough you can basically ruin it forever."

While salinity appears to be falling in surface water - which may be partly explained by a tapering off of dredging in recent months - soil and plants are still being exposed to dangerous salt levels, she said. She has no data for subterranean water and some of the pollution may have migrated into the earth only to be spread further afield, Suzuki said.

UENF's work is not without critics. State-owned water company Cedae challenged UENF's finding of unhealthy salt levels in artesian wells used for drinking water, saying they were too deep to be contaminated by work at Açu.

And Rio de Janeiro's State Agricultural University said its tests found water around Açu to be safe for irrigation after the initial spikes, but those tests are not as recent as UENF's.

Sick Cattle, Dead Pineapples

The Quitingute Channel runs through the land of Durval Ribeiro Alvarengo, 59, a tall, wiry and leather-skinned farmer and cattle rancher.

Late last year, Alvarengo told Reuters, he noticed his dairy cattle had diarrhea and their grassy fodder was dying. As milk production plummeted, he had to slaughter most of his herd.

The loss of 150,000 pineapple plants cost him 300,000 reais ($137,743), he said. Many fish, birds and other small wildlife also disappeared from the area, he added.

His story is repeated on nearby farms.

"You can see how my crops have been ruined with your own eyes," said Alvarengo's neighbor, Jose Roberto de Almeida, 51, as he ripped up crackly, dried-out plants from the ground.

Ricardo Hirota, director of the Subterranean Water Center at the University of São Paulo, is conducting two studies for LLX on the impact of dredging.

One examines ways to control the impact of future dredging. The second is assessing the impact of the original waste dumps to prevent a repeat of the salt pollution problem in late 2012.

Hirota suggests that the company has learned from its experience at Açu. "The area is very sensitive and there are many links between surface and underground water," he said. "We're learning a lot. The good thing is they're better prepared than in the past."

He declined to share any data, citing an LLX confidentiality agreement.

"I think you can appreciate how sensitive this is," he said. "The company has been under a lot of pressure."

Much may depend on the case launched by Oliveira. Even if he loses - and courts have often rejected his claims - a Brazilian prosecutors' near-complete independence, coupled with a legal system that encourages multiple appeals, can stretch even flimsy prosecutions into decade-long ordeals.

A senior official in the prosecutor's office said it expects public hearings by the end of August. The official declined to be identified.

"Eike needs to be very careful; Brazilians like to kick you when you're down," said Wilen Manteli, president of Brazil's private port association. "An environmental problem, even if unfounded, can be a lightning rod for a range of attacks. It would be a pity if this port does not get built."

($1 = 2.27 Brazilian reals)

(Additional reporting by Sergio Queiroz; Editing by Martin Howell and Leslie Gevirtz)

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