Under suspicion, Eike announces OGX default in the coming hours.

247 - The Fitch rating agency downgraded, this Monday (9), the debt rating of the oil company OGX, owned by Eike Batista, which indicates an "exceptionally high" credit risk, with imminent or inevitable default.

Faced with financial difficulties, the oil company hired the law firm Davis Polk & Wardwell to represent it in talks with creditors regarding a possible restructuring of its debt.

The lawyers and creditors are scheduled to meet in New York on Tuesday to discuss the matter.

The oil company has approximately US$3,6 billion in outstanding bonds. The value of the bonds has recently fallen to less than 20 cents on the dollar, indicating that creditors do not expect to recover much of their initial investment.

Furthermore, Eike is accused of having orchestrated a legal maneuver to evade the requirement to invest US$1 billion in the company, paying R$6,30 per share (today the stock is worth R$0,45, down 13,5%), as he had promised in 2012.

The accusation was made by investor Rafael Ferri in a letter sent to the Securities and Exchange Commission (CVM). According to Ferri, the condition for the request to sell the shares to Eike, the so-called exercise of the put option, is that it had to be done by the independent directors, and not by the company's board of directors, as happened last week.

Since independent directors Pedro Malan, Ellen Gracie, and Rodolpho Tourinho left the company in June and were not replaced, no one could legally demand that he fulfill his obligation.

“It is practically certain that the Arbitration Chamber will rule in your favor, and the exercise of the put option will be annulled due to the board's lack of authority to exercise it,” the investor says in his letter. “Since this annulment of the 'put' option will likely only occur after April 30, 2014, the expiration date of the put option, its exercise can no longer be carried out by the independent members of the board, as its term will have already expired.”

Below is the full text of the investor's letter to the CVM.

New open letter to the Securities and Exchange Commission (with a copy to Petronas):

Dear Mr. President:

Despite my having publicly anticipated that OGX's controlling shareholder, Mr. Eike Batista, would sell OGXP3 shares at the turn of August to September, during the adjustment of passive funds indexed to the Ibovespa, this Securities and Exchange Commission did nothing. According to article 118[1] of CVM Instruction 461, this regulatory body should have canceled all transactions carried out by Eike Batista in these last trading sessions, since the sales were made using information not disclosed to the market, related to the complex restructuring of the company's debts, which is underway.

After realizing earlier this year that most of the granted oil fields were economically unviable, Mr. Eike Batista sold 123 million shares of the company; and, as everyone already knows, only after these sales did he announce to the market that OGX would abandon the exploration of a large part of what was initially projected.

But that wasn't all: to avoid exercising the stock sale option he had granted to OGX (the infamous $1 billion USD put option), he forced the resignation of the independent members who were part of the company's Board of Directors. Or does anyone really believe that three former ministers (Pedro Malan, Ellen Gracie, and Rodolpho Tourinho) would organize a collective resignation on the same date as a form of protest?

Both the relevant fact concerning this put option and the latest Explanatory Notes to the financial statements (presented on 08/14/2013 to the CVM) indicate that the stock sale option granted to the company has a clear condition: that there are no better alternatives for obtaining cash, as decided by the majority of the independent members of the Board of Directors.

The controlling shareholder forced the removal of all independent members from the Board of Directors, thus preventing OGX from exercising its put option. Therefore, currently no one has the power to exercise that put option.

But why, then, was it announced to the market last Friday that the OGX board, in a unanimous decision, resolved to exercise the put option, if it did not have the power to do so? The answer is simple: so that the controlling shareholder can escape the put option.

The steps will be as follows: the controlling shareholder will initiate proceedings with the Market Arbitration Chamber, as per article 42 of the company's bylaws, alleging that OGX's board of directors does not have the power to exercise the put option, since this prerogative belongs to the independent members of the board of directors. It is practically certain that the Arbitration Chamber will rule in their favor, and the exercise of the put option will be annulled due to the board of directors' lack of authority to do so.

Since this cancellation of the put option will likely only occur after April 30, 2014, the expiration date of the put option, its exercise can no longer be carried out by the independent members of the board, as its term has already expired.

This legal maneuver, certainly crafted with utmost care by leading lawyers in Rio de Janeiro, did indeed succeed in preventing Mr. Eike Batista from injecting one billion dollars into OGX's coffers.

And this Securities and Exchange Commission: will it initiate a procedure to investigate the exercise of a put option by someone without the authority to do so, as well as the disclosure of this exercise as a relevant fact to the market, or will it stand by impassively, as it did when I alerted them to the sale of shares by the controlling shareholder at the turn of the month?

Finally, I clarify that this letter will be translated into English and Malay and sent to Petroliam Nasional Berhad (Petronas). After all, the Malaysian state-owned company needs to know that this put option was exercised irregularly – by someone without the authority – so that it can correctly decide whether to proceed with an $850 million investment by OGX.

Enough of misleading domestic and foreign investors.

Rafael Ferri