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Analysis: How debt woes brought Batista's Brazil empire to the brink

Eike Batista, Chairman and CEO of EBX Group speaks at a dinner panel discussion at the Milken Institute Global Conference in Beverly Hills,
Eike Batista, Chairman and CEO of EBX Group speaks at a dinner panel discussion at the Milken Institute Global Conference in Beverly Hills,

By Jeb Blount

SAO JOÃO DA BARRA, Brazil (Reuters) - 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 Talk of a "Brazilian miracle" has been replaced by nationwide street protests against corruption.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 SA were considering a bid for Batista's stake in MMX. The Folha de S.Paulo newspaper said Dutch transportation and logistics company Trafigura Beheer BV was 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.

See graphic on collapse of Batista's empire. http://link.reuters.com/cap29t

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's shipyard 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 Petronas in May, and in March from German utility E.ON SE and 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 BNDES and 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)

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