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BPZ to default on its debt and file for Chapter 11 bankruptcy
BPZ Energy, a Houston-based oil and gas company with operations in Peru and Ecuador, will likely default on its debt following the end of its elected grace period and file for Chapter 11 bankruptcy, several sources said.
The company did not return several emails and calls seeking comment for this story.
On 1 March, BPZ missed USD 62m in principal and interest payments when its 6.5% convertible notes became due, as reported. The company then chose to exercise a grace period, extending the principal payment deadline until 10 March and the interest payment deadline until 30 March. If BPZ cannot pay down the debt at the end of the grace period, then the company will default on the 2015s and on its outstanding 8.5% convertibles due 2017, following a filing for bankruptcy protection, as reported. The total amount outstanding in principal and interest stands around USD 229m.
BPZ is only delaying the inevitable since the grace period will not keep the company from falling over the brink of bankruptcy, several sources agreed. "It is only a matter of the banks and bondholders determining the best restructuring scenario," said an analyst familiar with the situation. A simple look at market conditions points to the company's inability to meet the 10 March deadline, said a second analyst.
Despite the tremendous legal fees and advisor costs associated with filing for Chapter 11, "bankruptcy is not the end of the world, especially for noteholders, who can sell off assets and purge the company of liabilities in the process," said an industry restructuring lawyer.
Asset sales should play an integral role to BPZ's workout with bondholders, sources agreed, although they differed on the timing that such transactions could occur. BPZ has wells that can fetch a decent rate, said the first analyst and a financial advisor. The company has brought three new wells online since the beginning of 1Q15, as reported. However, any transactions involving the sale of the wells could hinge on BPZ's partner Pacific Rubiales, the analyst said. The pair have a joint venture to operate Block Z-1, the offshore Corvina and Albacora fields in Peru, as reported. Pacific Rubiales could be in danger of its own financial workout, and BPZ would need to work closely with its partner to determine next steps, the same analyst said.
The company also has three unsused gas turbines that it has shopped around to wholesalers, as reported. However, at best, they would only fetch around USD 55m and will take a back burner to other M&A transactions and asset sales, said the first analyst.
BPZ could have avoided its current financial predicament had it acted sooner, sources agreed. Bondholders urged the company to refinance its debt before the end of 1H14, a bondholder said. However, management continued delaying tapping the markets as it expected oil prices to continue skyrocketing until it was too late. At the end of 1H14 crude oil prices reached USD 110 per barrel and on Friday were quoted at USD 59.7 per barrel.
In October, the company aimed to refinance its debt with a new USD 150m bond, but pulled the deal two weeks after its announcement, as reported. The quick decision to scrap the notes indicated that exposed bondholders were already prepared to engage in a workout scenario, said the financial advisor familiar with the situation. Even at YE 2014 "there was a lot of liquidity waiting to invest in the company, with optimistic expectations of a U-shaped price curve," the lawyer said.
"There is still a pile of money from people wanting distressed debt and exposure to the energy sector. However, pricing still has to work and investors will prefer US-based portfolios," the lawyer said. BPZ exists in a middle ground as a US credit that operates in an emerging market, but investors are realizing that oil market recovery might take significantly longer than originally expected, he said.
The convertibles are now trading at cents on the dollar while the stock has been delisted from the NYSE.
The situation's "reckless" mismanagement is surprising given that BPZ CEO Manolo Zuniga has significant stake in the company, a bondholder said. Zuniga was in denial about how dire the circumstances were, and it "was just a matter of hubris," he said. By December, BPZ realized the situation and had to hire advisors to address its liquidity constraints and capital structure issues, as reported. Houlihan Lokey and Stroock & Stroock & Lavan are the company's financial and legal advisors, respectively.
Now, the restructuring will likely see new management in the company, as bondholders swap debt for equity and hold for recovery, as reported. Bondholders will likely need to settle for 50 to 70 cents on the dollar, the first analyst said. Still, the value of the bonds will ultimately depend on the recovery price of oil, said the the advisor. In the meantime smaller noteholders are taking a back seat as OakTree Capital, the largest bondholder of the 2017s, takes the lead in advocating for bondholders' interests, sources said.
by Nneka Etoniru, New York