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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

-CONTINUES-

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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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.