Samarco holders hire Houlihan as financial advisor; expectation of eventual RJ request growing

30 September 2016

by Lucy Monteiro, Fabiana Lopes, Camila Dias, and Aline Lima

 

An ad hoc group of Samarco Mineracao’s bondholders has decided to hire Houlihan Lokey, working in association with Brazilian Metrica Investments, as financial advisor, according to a source close and a source familiar to the matter.

 

Holders were also close to tapping Dechert and Pinheiro Guimaraes as legal advisors, the first source close said.

 

Samarco (D/C/C) missed a coupon payment on 26 September, and entered a 30-day cure period. The Brazilian miner’s financial situation has deteriorated since the company ceased operations in November last year, after a dam breach caused it to lose its operating license. As of 31 December 2015, Samarco’s cash and cash equivalents were BRL 1.8bn (USD 552.6m), according to its most recent earnings release.

 

There are about 10 to 15 funds in the group, “split between hedge funds and real money,” according to the first source. Large holders included Alliance Bernstein, Prudential, BlackRock, Moneda and Calpers, as reported.

 

It is unclear when Samarco could restart operations or how much it and shareholders Vale and BHP Billiton will ultimately have to pay in fines and reparations. As such, it is difficult to say what kind of restructuring could be reached, and the possibility of a recuperacao judicial bankruptcy protection request is growing, according to a second source close and a second source familiar with the matter.

 

“It is very likely that a bankruptcy protection request will occur,” the second source familiar with the matter said. That Samarco is not generating any cash and Vale and BHP are not providing any financial support for Samarco to meet debt obligations points to a need for protection, the second source familiar said.

 

“Bankruptcy in Brazil preserves the ability of shareholders to keep ownership and control while haircutting creditors forcibly,” the second source close said.

 

“The window of opportunity for restructuring and surviving is closing very fast,” the second source familiar said. A successful out-of-court restructuring would require a quick return to operations.

 

However, this does not mean a bankruptcy protection request will happen immediately, said a restructuring lawyer.

 

“The non-payment of the coupon is not something that would trigger a bankruptcy protection request in the short term, because bondholders can organize themselves and provide a waiver,” the lawyer said. “However, if it takes a long time for the company to receive authorization to operate again, the pressure will increase and Samarco will not have other alternatives except to request the bankruptcy protection,” the lawyer said.

 

Creditors won’t want equity

 

“I think an out-of-court restructuring is a better approach, but it will depend on how all the parties wish to behave,” the first source close said. It would be more efficient, less costly and faster, according to the first source close.

 

A solution involving a debt-for-equity exchange, however, is seen as an unlikely scenario given the uncertainties in the case, the first source close said. “It is unlikely creditors will want to exchange debt for equity because there is the risk of successor liability,” the same source said.

 

“There are many ‘ifs’ in this case,” a third source close said. Equity would only be interesting to bondholders if the mining restarted its operations and creditors could sell the assets, the second source close said. However, the environmental liabilities are considered a risk in case of a debt to equity exchange as shareholders could be liable to pay it, the same source said.

 

No matter how the situation is resolved, Samarco will want a debt haircut, the second source close and the second source familiar said. Also, the haircut option now makes more sense in the context of the banks looking to sell their debt, according to the second source close.

 

HSBC, at least, is interested in selling its debt in the market. In 2013, Samarco took out a USD 250m five-year export prepayment loan with HSBC due 2018, according to company earnings documents, as reported.

 

Banks are inclined to extend debt maturities “as long as necessary” and would also accept a grace period of two to three years along with a covenant that says the company would return to operations, a banker said. The agreement should include all banks. Banks have taken a cooperative attitude and the general perception is that Samarco would pay everybody as soon as its operations are restored, the same source said.

 

However, Samarco’s situation is “tense,” the banker noted. If Samarco does not get its environmental license by the end of this year, then things could get even more complicated. There is no estimate regarding the restoration of its license, the same source said.

 

“The non-payment of bonds is seen as a way to pressure the environmental authority, but that is a dangerous game,” the banker said.

 

Samarco’s USD 500m 5.375% bonds due 2024 last traded at 35.5 on 29 September, according to MarketAxess. The company’s USD 700m 5.750% senior unsecured 2023 bonds traded at 34.4 today in small trades, and its USD 1bn 4.125% senior unsecured bonds due 2022 last traded at 34.2 today.

 

Houlihan Lokey, Metrica Investments, Dechert and Pinheiro Guimaraes declined to comment on the matter.