OSX 3 Leasing B.V. OSXBBZ
May 05, 2014 - 4:19pm EST by
rskfrarb210
2014 2015
Price: 108.00 EPS $0.00 $0.00
Shares Out. (in M): 1 P/E 0.0x 0.0x
Market Cap (in $M): 513 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0.0x 0.0x

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  • Undervalued Bond
  • Oil and Gas

Description

OSX 3 Leasing B.V. $500mm ($512.5mm) Senior Secured Bonds due 2015 (OSXBBZ)
 
This is a simple short-dated credit idea where you pay 108 today and collect 121 by Mar 2015.  Your IRR will be ~14%, with the ultimate amount of cash received from interest payments dependent on unscheduled mandatory prepayments.  Your downside is protected because the credit is effectively secured by three assets whose values total somewhere between $1.2bn and $2.0bn.  This is a rock-solid double-digit return in less than one year.
 
Two years ago, Eike Bastista was the richest person in Brazil.  In fact, Batista was ranked as the seventh-richest person in the world.  He made his money by turning his EBX Group from a single, private natural resources comapny into a multi-company group with several publicly-traded, pure-play companies in Brazil--capitalizing on the Brazilian natural resources and infrastructure investment theme.  These entities ranged from iron ore mining, port logistics, power generation and nat gas onshore E&P, coal mining, and offshore oil and gas E&P.  The offshore oil and gas E&P (OGX) dominated Batista's wealth.  Batista was ultimately worth ~$34.5bn at his peak.  He was then quoted in a Daily Mail article as saying that he would overtake Carlos Slim as teh world's richest man in the 'next three of four years.'  Of course, Batista said, "I'm not bragging.  It's just a consequence of all the things we have done.  Just look at the assets.  Jesus, by 2015 we will be making $10 billion [per year]."  A picture accompanying the article showed Batista's $1.3mm Mercedes SLR McLaren that he kept in his living room.  I do not think the Mercedes is still in the living room since Eike's son, Thor, used it to kill someone and left it with significant damage.
 
There is a good Reuters story here and they have a good link in that article to a graphic showing the collapse in Batista's companies' market caps.
 
In order to not miss out on any opportunity to make a dollar, Batista also created an oil services company (OSX) that would exist to serve OGX.  As a sister company of OGX, OSX was given preferential rights to construct, lease, and service offshore assets and equipment to OGX.  In order to entice investors on the OSX IPO, all charter contracts with OGX were structured to guarantee OSX a 15% leveraged IRR.  OSX ordered FPSOs that would be owned by OSX and leased to OGX.  What could go wrong?
 
Short story short, OGX turned out to not have the reserves it thought it had.  In Jul 2013, OGX announced that at its one offshore field currently in production (Tubarao Azul) "there is no technology currently available that would economically allow any additional investment aiming to increase the field production curve and the wells under production could cease to produce in 2014."  OSX's FPSO OSX1 is being used at that oil field.  OGX also disclosed that the results for Tubarao Azul had led the company to "reinterpret" the data for the three other oil fields (Tubarao Tigre, Tubarao Gato, and Tubarao Areia) leading to a conclusion that there is no technology currently available that would economically allow the development of those fields.  Those three fields were to be served by FPSO OSX2.  The remaining oil field (Tubarao Martelo) is now in production and is considered OGX's most valuable field.  This field is served by FPSO OSX3.  Because the initial estimated recoverable barrels were too high, the dayrate under the original charter for FPSO OSX3 was too high.  Each of these FPSOs is financed with project-level, non-recourse debt at different SPVs.  OSX3 is unique in that it has no bank debt.  This bond issue was intended to be bridge financing but OSX was unable to issue new debt in Mar 2013.  This is why the bonds are secured like traditional bank debt.
 

(US$ in millions)

OSX1

OSX2

OSX3

Bank Debt

 

$300

$437

Secured Bonds

500

Unsecured Debt

110

Total

 

$300

$547

$500

 
If you are not familiar with FPSOs, Bernstein published a good overview of in Jun 2012 titled, "The Long View: FPSO Construction - A Secular Theme to Believe In."
 
OGX defaulted on its debt and has basically finished a debt-for-equity swap led by PIMCO.  Becuase OGX could not pay the dayrate, OSX filed for Brazilian bankruptcy in Nov 2013, but the filing left the FPSO leasing units out of the bankruptcy.  Nonetheless, OSX missed the Dec 2013 interest payment on these bonds.  That default necessitated a restructuring of this bond which was completed in Mar/Apr 2014.
 
The terms of the restructuring are interesting and create a nice piece of short-dated paper.  The bondholders received take-back paper with a PIK consent fee of 2.5%, a step-up in rate to 13% cash-pay from 9.25%, and interest accrued since Oct 30, 2013.  So, upon the next interest payment date on Jun 20, 2014, there will be three interest payments (Dec 2013, Mar 2013, Jun 2014) made.  
 
By my count, that is 8.7 points that will be received on Jun 2014, while you still have a 102.5 claim at 13% cash-pay.  These bonds trade at 108 today.
 
The beauty here is that you are taking very little credit risk.  Under the restructuring the bondholders obtained a sale process commitment.  At least 6 months prior to maturity, OSX is obligated to start a multi-trackprocess to (1) refinance in full these OSX3 bonds, (2) sell the FPSO OSX3 with and subject to the charter, or (3) sell 100% of the OSX 3 Leasing BV equity, with and subject to the charter.  OSX must engage a banker or FPSO broker.  The PIMCO-led post-reorg OGX will have full and open access to the marketing process and the hired banker and broker.  Absent a refinancing, OSX shallbe obligated to sell the FPSO or the OSX 3 Leading BV equity to the highest and best bidder whose bid enables the prompt repayment of the OSX3 bonds.  If OSX cannot consummate a refinancing or sale prior ro maturity of the OSX3 bonds, the post-reorg OGX shall have the right to purchase all of the OSX3 bonds (to ensure they have a critical asset for the key OGX oil field asset).  Additionally, there is a mandatory repayment cash sweep whereby any equity value that OSX realizes upon selling FPSO OSX1 or FPSO OSX2 must be applied towards a prepayment of these bonds.  There is a standstill and joint sale process agreement in place with the OSX2 banks for the sale of the FPSO OSX2, which has been on the market since 4Q2013.  The sales process is being run jointly by Pareto, as the broker chosen by the OSX2 bank creditors, and Credit Suisse.  FPSO OSX1 is currently operating in Tubarao Azul until later this year when the plan is to sell OSX1 after OSX2 has been sold.
 
This means you have three bites at the apple; you are effectively secured by three different FPSOs.  FPSO OSX1 was purchased by OSX out of Nexus' bankruptcy for $665mm and Nexus had a yard cost of $578mm.  This asset has a 25 year useful life and first oil was produced in Jan 2012, so I estimate it has a fully depreciated economic cost of $526mm.  FPSO OSX2 is a sister vessel to FPSO OSX3.  OSX never disclosed a cost for OSX2, but did disclose an estimated price of $775mm back in Apr 2013.  We know that OSX3 had an actual capex of $800mm into the asset and an all-in cost of $1,067mm.  As part of the OSX restructuring, the company disclosed that it obtained a valuation of OSX3 from Kennedy Marr in 2014 which indicated an open market value of $1,150-1,170mm.  OSX2 has not been deployed but was OSX took delivery in Sep 2013.  The asset has a 25 year useful life, so I estimate a fully depreciated economic cost of $754mm.  OSX3 has a 25 year useful life as well and arrived in Brazil in Aug 2013, so I estimate a fully depreciated economic cost of $782mm.
 
Put it all together, and you are covered 2.4-4.0x through underyling asset value.  
 
     

LOW

 

HIGH

     

OSX1

OSX2

OSX3

TOTAL

 

OSX1

OSX2

OSX3

TOTAL

 

Asset Value

$526

$754

$782

   

$526

$1,160

$1,160

 
 

Bank Debt

 

(300)

(437)

NA

   

(300)

(437)

NA

 
 

Unsecured Debt

NA

(110)

NA

   

NA

(110)

NA

 
 

Distributable Value

$226

$207

$782

$1,215

 

$226

$613

$1,160

$1,999

 

OSX3 Claim

     

$513

       

$513

 

Asset Coverage

     

2.4x

       

3.9x

 
I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.

Catalyst

Mandatory prepayment from sale of FPSO OSX1
Mandatory prepayment from sale of FPSO OSX2
Mandatory prepayment from sale of FPSO OSX3
Refinancing and repayment at maturity
Buyout from OGX at maturity
    sort by    

    Description

    OSX 3 Leasing B.V. $500mm ($512.5mm) Senior Secured Bonds due 2015 (OSXBBZ)
     
    This is a simple short-dated credit idea where you pay 108 today and collect 121 by Mar 2015.  Your IRR will be ~14%, with the ultimate amount of cash received from interest payments dependent on unscheduled mandatory prepayments.  Your downside is protected because the credit is effectively secured by three assets whose values total somewhere between $1.2bn and $2.0bn.  This is a rock-solid double-digit return in less than one year.
     
    Two years ago, Eike Bastista was the richest person in Brazil.  In fact, Batista was ranked as the seventh-richest person in the world.  He made his money by turning his EBX Group from a single, private natural resources comapny into a multi-company group with several publicly-traded, pure-play companies in Brazil--capitalizing on the Brazilian natural resources and infrastructure investment theme.  These entities ranged from iron ore mining, port logistics, power generation and nat gas onshore E&P, coal mining, and offshore oil and gas E&P.  The offshore oil and gas E&P (OGX) dominated Batista's wealth.  Batista was ultimately worth ~$34.5bn at his peak.  He was then quoted in a Daily Mail article as saying that he would overtake Carlos Slim as teh world's richest man in the 'next three of four years.'  Of course, Batista said, "I'm not bragging.  It's just a consequence of all the things we have done.  Just look at the assets.  Jesus, by 2015 we will be making $10 billion [per year]."  A picture accompanying the article showed Batista's $1.3mm Mercedes SLR McLaren that he kept in his living room.  I do not think the Mercedes is still in the living room since Eike's son, Thor, used it to kill someone and left it with significant damage.
     
    There is a good Reuters story here and they have a good link in that article to a graphic showing the collapse in Batista's companies' market caps.
     
    In order to not miss out on any opportunity to make a dollar, Batista also created an oil services company (OSX) that would exist to serve OGX.  As a sister company of OGX, OSX was given preferential rights to construct, lease, and service offshore assets and equipment to OGX.  In order to entice investors on the OSX IPO, all charter contracts with OGX were structured to guarantee OSX a 15% leveraged IRR.  OSX ordered FPSOs that would be owned by OSX and leased to OGX.  What could go wrong?
     
    Short story short, OGX turned out to not have the reserves it thought it had.  In Jul 2013, OGX announced that at its one offshore field currently in production (Tubarao Azul) "there is no technology currently available that would economically allow any additional investment aiming to increase the field production curve and the wells under production could cease to produce in 2014."  OSX's FPSO OSX1 is being used at that oil field.  OGX also disclosed that the results for Tubarao Azul had led the company to "reinterpret" the data for the three other oil fields (Tubarao Tigre, Tubarao Gato, and Tubarao Areia) leading to a conclusion that there is no technology currently available that would economically allow the development of those fields.  Those three fields were to be served by FPSO OSX2.  The remaining oil field (Tubarao Martelo) is now in production and is considered OGX's most valuable field.  This field is served by FPSO OSX3.  Because the initial estimated recoverable barrels were too high, the dayrate under the original charter for FPSO OSX3 was too high.  Each of these FPSOs is financed with project-level, non-recourse debt at different SPVs.  OSX3 is unique in that it has no bank debt.  This bond issue was intended to be bridge financing but OSX was unable to issue new debt in Mar 2013.  This is why the bonds are secured like traditional bank debt.
     

    (US$ in millions)

    OSX1

    OSX2

    OSX3

    Bank Debt

     

    $300

    $437

    Secured Bonds

    500

    Unsecured Debt

    110

    Total

     

    $300

    $547

    $500

     
    If you are not familiar with FPSOs, Bernstein published a good overview of in Jun 2012 titled, "The Long View: FPSO Construction - A Secular Theme to Believe In."
     
    OGX defaulted on its debt and has basically finished a debt-for-equity swap led by PIMCO.  Becuase OGX could not pay the dayrate, OSX filed for Brazilian bankruptcy in Nov 2013, but the filing left the FPSO leasing units out of the bankruptcy.  Nonetheless, OSX missed the Dec 2013 interest payment on these bonds.  That default necessitated a restructuring of this bond which was completed in Mar/Apr 2014.
     
    The terms of the restructuring are interesting and create a nice piece of short-dated paper.  The bondholders received take-back paper with a PIK consent fee of 2.5%, a step-up in rate to 13% cash-pay from 9.25%, and interest accrued since Oct 30, 2013.  So, upon the next interest payment date on Jun 20, 2014, there will be three interest payments (Dec 2013, Mar 2013, Jun 2014) made.  
     
    By my count, that is 8.7 points that will be received on Jun 2014, while you still have a 102.5 claim at 13% cash-pay.  These bonds trade at 108 today.
     
    The beauty here is that you are taking very little credit risk.  Under the restructuring the bondholders obtained a sale process commitment.  At least 6 months prior to maturity, OSX is obligated to start a multi-trackprocess to (1) refinance in full these OSX3 bonds, (2) sell the FPSO OSX3 with and subject to the charter, or (3) sell 100% of the OSX 3 Leasing BV equity, with and subject to the charter.  OSX must engage a banker or FPSO broker.  The PIMCO-led post-reorg OGX will have full and open access to the marketing process and the hired banker and broker.  Absent a refinancing, OSX shallbe obligated to sell the FPSO or the OSX 3 Leading BV equity to the highest and best bidder whose bid enables the prompt repayment of the OSX3 bonds.  If OSX cannot consummate a refinancing or sale prior ro maturity of the OSX3 bonds, the post-reorg OGX shall have the right to purchase all of the OSX3 bonds (to ensure they have a critical asset for the key OGX oil field asset).  Additionally, there is a mandatory repayment cash sweep whereby any equity value that OSX realizes upon selling FPSO OSX1 or FPSO OSX2 must be applied towards a prepayment of these bonds.  There is a standstill and joint sale process agreement in place with the OSX2 banks for the sale of the FPSO OSX2, which has been on the market since 4Q2013.  The sales process is being run jointly by Pareto, as the broker chosen by the OSX2 bank creditors, and Credit Suisse.  FPSO OSX1 is currently operating in Tubarao Azul until later this year when the plan is to sell OSX1 after OSX2 has been sold.
     
    This means you have three bites at the apple; you are effectively secured by three different FPSOs.  FPSO OSX1 was purchased by OSX out of Nexus' bankruptcy for $665mm and Nexus had a yard cost of $578mm.  This asset has a 25 year useful life and first oil was produced in Jan 2012, so I estimate it has a fully depreciated economic cost of $526mm.  FPSO OSX2 is a sister vessel to FPSO OSX3.  OSX never disclosed a cost for OSX2, but did disclose an estimated price of $775mm back in Apr 2013.  We know that OSX3 had an actual capex of $800mm into the asset and an all-in cost of $1,067mm.  As part of the OSX restructuring, the company disclosed that it obtained a valuation of OSX3 from Kennedy Marr in 2014 which indicated an open market value of $1,150-1,170mm.  OSX2 has not been deployed but was OSX took delivery in Sep 2013.  The asset has a 25 year useful life, so I estimate a fully depreciated economic cost of $754mm.  OSX3 has a 25 year useful life as well and arrived in Brazil in Aug 2013, so I estimate a fully depreciated economic cost of $782mm.
     
    Put it all together, and you are covered 2.4-4.0x through underyling asset value.  
     
         

    LOW

     

    HIGH

         

    OSX1

    OSX2

    OSX3

    TOTAL

     

    OSX1

    OSX2

    OSX3

    TOTAL

     

    Asset Value

    $526

    $754

    $782

       

    $526

    $1,160

    $1,160

     
     

    Bank Debt

     

    (300)

    (437)

    NA

       

    (300)

    (437)

    NA

     
     

    Unsecured Debt

    NA

    (110)

    NA

       

    NA

    (110)

    NA

     
     

    Distributable Value

    $226

    $207

    $782

    $1,215

     

    $226

    $613

    $1,160

    $1,999

     

    OSX3 Claim

         

    $513

           

    $513

     

    Asset Coverage

         

    2.4x

           

    3.9x

     
    I do not hold a position of employment, directorship, or consultancy with the issuer.
    Neither I nor others I advise hold a material investment in the issuer's securities.

    Catalyst

    Mandatory prepayment from sale of FPSO OSX1
    Mandatory prepayment from sale of FPSO OSX2
    Mandatory prepayment from sale of FPSO OSX3
    Refinancing and repayment at maturity
    Buyout from OGX at maturity
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