One for the Road


By Monish Chhabra ǀ 14th November 2013

Last month, OGX – one of the 6 companies Eike Batista listed on Sau Paulo stock exchange – filed for bankruptcy crushed under its $5 billion obligations. It is the largest corporate default in the history of Latin America.

This petroleum company that announced one find after another in places where the state-owned Petrobras couldn’t find oil (at least at justifiable prices), was listed in 2008 in a $4 billion IPO. This was then the largest IPO in Brazil’s history.

The stock rose 3-times over the next 2 years. The company piled on debt through the years, when in fact it never produced a drop of oil until 2012.

Investors like Ontario Pension Fund own 11% of the shares, and PIMCO is its largest creditor holding bonds worth $600 million.

On the 9th of October, the company didn’t have $45 million to make a bond payment.

Eike Batista with President Dilma Rousseff of Brazil, 2012
Source: Ricardo Moraes/Reuters,

Batista is the man who was worth $35 billion last year and was named one of the 100 most influential by TIME magazine in 2012. He declared that he would be worth $100 billion by 2020.

Just a year later, there is not much left to mention.

Another troubled and indebted entity in news this month is Puerto Rico.

The local government there has piled on $87 billion of debt while funding its deficit spending over the years. Investors kept buying its tax-free bonds until they suddenly decided not to.

And now, the territory is locked out of the debt market. The government is relying on bank credit to fund itself temporarily with its credit rating hanging by a thread, one notch above junk.

The debt binge was aided by banks like UBS who have a large local presence. And the wave spread all the way from the government to the citizens.

The bankers allegedly encouraged its customers to take personal lines of credit to borrow cash, topped it up with margin financing and put it all in 2-times levered bond funds. That is 3 layers of credit to invest in credit!

These stories are not restricted to just Brazil or Puerto Rico.

The table below shows the growth of credit in various economies during the recent bull market. Private credit shown below captures both the household debt as well as the corporate credit.

Data: BIS, Bloomberg

Most emerging markets have had a nice party; credit booze flowing freely, topped with stock market ecstasy. Add in the property price growth, and this is Nirvana.

However every party-goer knows – as much as they wish otherwise - that one cannot escape the after-effects. Only the next day we shall know, how bad the hangover is.

In the world of credit and alcohol alike, severe inebriation doesn’t end softly.

This write-up is for informational purpose only. It may contain inputs from other sources, but represents only the author’s views and opinions. It is not an offer or solicitation for any service or product. It should not be relied upon, used or construed as recommendation or advice. This report has been prepared in good faith. No representation is made as to the accuracy of the information it contains, nor any commitment to update it.