Post on 25-May-2020
Page 1 DW-AMER 18-MAR-16
LEGAL ANALYSIS ODEBRECHT OIL AND GAS S.A. | 7 JUNE 2017
ODEBRECHT OIL AND GAS FILE RARELY REQUESTED EXTRAJUDICIAL RECOVERY PROCESS TO IMPLEMENT BOND DEBT RESTRUCTURING
OVERVIEW
O debrecht Oil and Gas S.A. (“OOG”) requested Court
oversight on the renegotiation of nearly BRL 15.9bn of
bond debt, through the filing of an “Extrajudicial Recovery”
process – a rarely used restructuring tool provided for in
Brazilian reorganization law. Unique to this process is the
classification scheme, which permits the reorganization of
separate ‘species’ of claims of equal priority for voting
purposes, like splitting bond derived claims from trade claims.
While typical in U.S. bankruptcies, this sort of sub classification
has been a source of significant objection in Brazilian Judicial
Recovery proceedings, particularly lately as we have observed
in OAS[1] and Oi[2] cases. In this Special Report, the Debtwire
legal analyst team takes a closer look at OOG’s request,
highlighting the feasible next steps of the proceeding and its
main differences with a Judicial Recovery request.
CLICK HERE for the Debtwire legal analyst team’s primer on the
Brazilian restructuring system.
BACKGROUND — OOG BOND’S NEGOTIATION AND THE EXTRAJUDICIAL RECOVERY REQUEST
After several out-of-Court debt renegotiations with bondhold-
ers since September 2015[3], which resulted in agreed waivers
and payment reschedules, on 23 May OOG and ten other
Brazilian and foreign affiliates from the Odebrecht
conglomerate’s Oil and Gas arm[4] filed a petition requesting
an in-Court process to restructure its financial debt. Specifically,
the company aims to redefine the payment conditions of its
debt regarding the notes due 2021 and 2022, as well as its debt
the financial unsecured creditors. According to the initial peti-
tion, the proposed restructuring does not include labor, se-
cured or other unsecured claims like suppliers and small / mi-
croenterprise claims, and the plan does not propose payment
in advance nor unfavorable treatment to non-impaired credi-
tors, as stated in Section 161, § 2º of Brazilian Reorganization
Law.
As opposed to a Judicial Recovery protection request, where
the company shall present a reorganization plan after the initial
Court decision that allows it to move forward with the process,
in the Extrajudicial Recovery the plan must be (i) attached to
the initial petition and (ii) previously approved by at least 60%
of the claims to be restructured. In OOG’s case, the company
filed three different plans and evidenced the minimum approv-
al quorum for each according to the chart below (approximate
values):
On 25 May, the Court granted the Extrajudicial Recovery re-
quest, which held that all the requirements provided for in the
Brazilian Reorganization Law were evidenced in the initial peti-
tion. By using this process, the company hopes to impose new
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CONTENTS
OVERVIEW 1
BACKGROUND - OOG BOND’S NEGOTIATION AND THE
EXTRAJUDICIAL RECOVERY REQUEST 1
DEBT RESTRUCTURING IN BRAZIL THROUGH AN EXTRAJU-
DICIAL RECOVERY PROCESS 2
THE RESTRUCTURING PLANS 3
ENDNOTES 4
ABOUT THE AUTHOR AND CONTACT INFORMATION
Arthur Almeida
Legal Analyst, Latin America
Tel: +5511 3504-0154 | Arthur.Almeida@debtwire.com
Arthur Almeida is a former restructuring attorney. Prior to joining
Debtwire as a Legal Analyst, he practiced with Passos & Sticca
Advogados Associados, as well as working in the legal depart-
ment of Banco Fibra S.A.
Arthur’s experience includes participating in major civil litigation
on credit recovery. He has represented creditors such as banks
and financial institutions in high-profile restructurings.
Plan Claims Debt (BRL bn) Approval
Percentage
Consenting
Creditors (BRL bn)
A Notes due 2021
3.48 69% 2.40
B Notes due 2022
6.36 63.5% 3.84
C Unsecured financial creditors
6.06 69.7% 4.33
Total 15.90 10.57
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LEGAL ANALYSIS ODEBRECHT OIL AND GAS S.A. | 7 JUNE 2017
BACKGROUND — OOG BOND’S NEGOTIATION AND THE EXTRAJUDICIAL RECOVERY REQUEST (CONT’D)
payment conditions – already accepted by most part of credi-
tors, as highlighted above – upon the dissident ones, a target
easier to be achieved in this sort of proceeding than it would be
if a Judicial Recovery process have been filed, as we tackle in
the section below.
But the company also was able to avail itself of one of the pro-
tections of a Judicial Recovery process. The Court has also is-
sued a preliminary order to protect the company against indi-
vidual execution lawsuits through a 180-day stay period, cave-
ating lawsuits regarding labor, tax or extraconcursal[5] claims.
It’s noteworthy that here we have another relevant difference
between the Judicial and the Extrajudicial Recovery process:
while in this proceeding a 180-day stay period is automatically
granted by the Court when the company is authorized to contin-
ue its restructuring process, there’s no similar statement for an
Extrajudicial Recovery request[6], so the company asked for the
protection as an urgent measure to avoid dissident bondholders
and financial creditors to continue execution lawsuits or request
for the insolvency of the company during such period.
DEBT RESTRUCTURING IN BRAZIL THROUGH AN EXTRAJUDICIAL RECOVERY PROCESS
Brazilian Reorganization Law (Law number 11.101/2005) rules
regulate three distinct restructuring processes: Judicial
Recovery (in-court restructurings), Extrajudicial Recovery (also
called “out-of-Court”) and Bankruptcy proceedings
(liquidations). Notwithstanding that the legislation is now ten
years old, it is still a relatively recent development, especially
considering that the previous legislation—Decree-Law number
7.661 from 21 June 1945—governed reorganization procedures
for almost sixty years. Unlike its predecessor, the current law
was designed with reorganization and creditor participation at
its core, in order to stimulate economic activity and to preserve
the employment of workers and the rights of creditors.
Through the implementation of an Extrajudicial process in the
governing legislation, the legislature’s goal was to revoke previ-
ous law that considered out-of-Court debt renegotiations as a
sort of “acts of bankruptcy” which could give creditors grounds
to request a court declaration of a company’s bankruptcy. Thus,
current law now allows companies to negotiate debt modifica-
tions outside of a court process without the fear of an un-
planned bankruptcy declaration.
Similar to a prepackaged Chapter 11 process in the US, in the
Extrajudicial Recovery process debtor and creditors negotiate
debt restructuring measures and result of negotiation is pre-
sented to Court’s affirming, in order to be imposed to the dissi-
dent creditors’ minority. Thus, while termed an ‘extrajudicial’
process, the Court is ultimately involved as the purpose of an
out-of-Court process is to obtain Court ratification over negoti-
ated debt adjustments over the objection of dissenters—
essentially a cram process. While the Judicial Recovery process
contemplates a reorganization of all debt classes – labor, se-
cured, unsecured and microenterprise/small company’s claims
– through a recovery plan, out-of-Court restructurings are tai-
lored to specific debt obligations.
The ability to separate creditors by debt instrument is contro-
versial in a Judicial Recovery—a practice called “sub classes”
that is currently presenting controversy as any such sub class is
ignored when tallying votes on a Judicial Recovery plan, with
those classes being collapsed into the larger overarching class.
In OOG’s case, for instance, while in a Judicial Recovery process
all the bondholders’ claims would be inserted in the Unsecured
Creditors’ Class (Class III) for the vote on a reorganization plan,
regardless of the notes series (2021 or 2022) and together with
other unsecured claims like suppliers, financial creditors, bank
lenders and others, the Extrajudicial Recovery plan must obtain
individual approval of each one of these claims, to be imposed
upon dissident creditors. Such requirement moves away quor-
um manipulation possibilities for the approval of a plan, as we
have recently noticed in some large Brazilian Judicial Recovery
processes like OAS and Oi.
Although processes are different, companies seeking judicial
ratification of a reorganization plan approval through the Extra-
judicial Recovery process must fulfill the same requirements for
a Judicial Recovery request, including that they should have
been developing their activities for at least two years prior to
the request, and either should not have been declared bankrupt
before (Judicial Recovery proceeding or not) or have had any
previous bankruptcy decrees declared extinct through res judi-
cata Court decisions. A company must also not have obtained an
initial grant of authorization to enter an Extrajudicial Recovery
process within the last five years, and both the companies and
their management must not have been previously convicted of
committing crimes described in the recovery law.
In order to obtain court approval of an Out-of-Court plan draft-
ed by the company and presented to the creditors, (i) more
than 60% of each modified class must vote to approve the
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LEGAL ANALYSIS ODEBRECHT OIL AND GAS S.A. | 7 JUNE 2017
DEBT RESTRUCTURING IN BRAZIL THROUGH AN EXTRAJUDICIAL RECOVERY PROCESS (CONT’D)
proposal, and (ii) the proposed treatment cannot distinguish
between accepting and rejecting class members. Moreover,
plans that propose different payment conditions to creditors in
the same class cannot be submitted for judicial confirmation.
Notably, Out-of-Court plans cannot adjust tax claims or labor
claims.[7]
After receiving the request to confirm an Out-of-Court plan, the
judge will determine the date of Public Notice, which starts a 30
-days deadline for creditors to object. Should there be no ob-
jections, the judge will confirm the Out-of-Court plan.[8] Note
that, according to Section 164 of Brazilian Reorganization Law
creditors’ objections may not challenge the economic, financial
terms of the plan, but only legal aspects like the non-attainment
of minimum quorum approval mentioned above or another
legal statement (provided for either in the Brazilian
Reorganization Law or in further governing laws). Creditors may
also argue that the company committed some of the crimes
provided for at Sections 94 or 130 of reorganization law, like
frauds against creditors.[9]
THE RESTRUCTURING PLANS
In a Notice to the Market published on 23 May, the company
clarified that the bonds due 2021 and 2022 and secured by the
drilling units owned by OOG’s affiliates will be exchanged for
new bonds, with revised terms based on the present cash flow
of the assets. Thus, OOG creditors will receive new perpetual
participatory bonds which ensure the right to receive a share of
any dividend distributions of OOG, in exchange for the current
debt. The press release also informs that new bonds
amortizations will occur quarterly, in two tranches, according to
the following conditions:
(i) The first tranche has a fixed amortization schedule, and bears
the same interest rate (6.35% for the 2021 bonds and 6.72% for
the 2022 bonds) and the maturity (2021 and 2022) as the
current bonds;
(ii) The second tranche is subordinated to the first tranche and
has a 100% variable amortization, based on the cash surplus of
the projects. The second tranche bonds will bear interest at a
rate 1% higher than the first tranche bonds and mature in 2026.
The restructuring was proposed through three Extrajudicial
Recovery Plans (Plans A, B and C) with each addressing a
separate class of similarly situated creditors. Thus, the first
OOG’s extrajudicial recovery plan, named “Plan A”, was
presented by Odebrecht Drilling Norbe VIII / IX Ltd; Odebrecht
Drilling Norbe Eight Gmbh; and Odebrecht Drilling Norbe Nine
Gmbh, to restructure debt belonging to holders of the claims
arising from the issuance of bonds due 2021. The major 2021
bondholders that accepted this plan were: JPMorgan Chase
Bank National Association (USD 256.82m claim); State Street
Bank and Trust Company (USD 236.75m claim); Brown Brothers
Harriman & Co (USD 118.43m claim); Bank of New York Mellon
(USD 77.21m claim); and Citibank (USD 19.39m claim).
The second Extrajudicial Recovery Plan (“Plan B”) was
presented by Odebrecht Offshore Drilling Finance Ltd., ODN I
Gmbh; Odebrecht Drilling Norbe Six Gmbh; and ODN TAY IV
Gmbh, and refers to the beneficiaries of the credits arising
from the issuance of two tranches of bonds due 2022. Such plan
was accepted by creditors: JPMorgan Chase Bank National
Association (USD 468.04m claim); State Street Bank and Trust
Company (USD 262.36m claim); Bank of New York Mellon (USD
253.37m claim); Brown Brothers Harriman & Co (USD 111.80m
claim) and Citibank (USD 67.84m claim). Among the measures
stated in Plans A and B are included provisions regarding
compliance “Corporate Governance” (Governança Corporativa),
as the institution of a creditors’ representative which will be
entitled to receive information and opine on the approval of the
company’s annual budgets.
Lastly, Odebrecht Oil And Gas S.A.; Odebrecht Oil & Gas Finance
Limited; Odebrecht Oil Services Ltd; and Odebrecht Oil & Gas
Gmbh filed a third plan to restructure unsecured financial
claims (Plan C), including (i) debts contracted in the
international capital market and in the financial market vis-à-vis
unsecured creditors to obtain working capital and lines of credit
for corporate financing of the Group OOG, (ii) the exposure
arising from counter-guarantees provided by Odebrecht Oleo e
Gás S.A. and Odebrecht Oil & Gas Gmbh in the context of letters
of credit and payment guarantees linked to the Bonds; and (iii)
claims held by the holders of Bonds 2021 and Bonds 2022,
related to the some restructuring measures provided at Plans A
and B regarding the payment of originally due by Odebrecht
Óleo e Gás S.A. Plan C have been accepted by banks, financial
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LEGAL ANALYSIS ODEBRECHT OIL AND GAS S.A. | 7 JUNE 2017
THE RESTRUCTURING PLANS (CONT’D)
institutions and perpetual bondholders including: Banco Bradesco SA Grand Cayman Branch (USD 81.67m claim); Banco do Brasil
NY Branch (USD 108.3m claim); Banco Bradesco (USD 62.99 claim); ING Bank NY (USD 27.78m claim) and several entities be-
longing to Swiss Re International SE (USD 216.86m aggregate claim).
ENDNOTES
[1] CLICK HERE for the Debtwire legal analyst team’s primer on the OAS in-Court restructuring and appeals on the plan approval,
where creditors argue quorum manipulation through the creation of subclasses in the Unsecured Creditors’ class.
[2] CLICK HERE for the Debtwire legal analyst team’s primer on the Oi mediation process, where creditors affirm that company’s
proposal for an expedited recovery for creditors holding BRL 50,000 or less in credits could lead to to plan vote manipulation.
[3] The company had been negotiating with an ad hoc group of holders of its 2022 bonds since Petrobras cancelled the charter
and services contracts with OOG’s ODN Tay IV rig, in September 2015. Further, on 19 April 2016 OOG defaulted on the perpetual
notes after the termination of a 30-day grace period that started 17 March, as reported.
[4] In 2006, Odebrecht group concentrated its investments in oil and gas in a new company named Odebrecht Oil & Gas.
[5] Claims non-impaired by bankruptcy proceedings like those guaranteed by fiduciary lien, and certain bank loans relating to
export finance, like the ACC - Advance on Export Contracts (“adiantamento a contrato de câmbio para exportação”).
[6] Actually, Section 161, § 4º of Brazilian Reorganization Law states that the request for approval of the extrajudicial recovery
plan shall not entail the suspension of rights, actions or executions against the company, neither the filing for the company’s
insolvency by creditors not subject to the extrajudicial recovery plan.
[7] Labor claims may be rescheduled through the Out-of-Court process with holder consent, while tax claim adjustments require
legislative action.
[8] Note that, if the company does not comply with the plan terms, the restructuring will not be automatically converted to a
bankruptcy process—creditors will need to ask for a declaration of bankruptcy.
[9] Should creditors object the company’s Extrajudicial Recovery request on the terms mentioned above, the company must
present its answer on the following five days, and then the Court will have five additional days to analyze both parties’ arguments
and make a confirmation decision. At last, parties will have fifteen days to appeal this decision, in order to address the matter to
the State Court of Justice. After the judge confirms the Out-of-Court plan, creditors are bound to the terms of the plan and only
unanimous consent of the accepting creditors can modify the plan post-confirmation.
Disclaimer
Any opinions, analysis or information provided in this article are not intended, nor should be construed, as legal advice, including, but not limited to, investment
advice as defined by the Investment Company Act of 1940. Debtwire does not provide any legal advice and subscribers should consult with their own legal
counsel for matters requiring legal advice.