BHP targeted as Samarco pulls the plug
Lenders circling $US2.7bn owed by BHP and Vale’s Samarco iron ore operations in Brazil say the company has ‘entirely failed to negotiate’.
Lenders circling $US2.7bn ($3.5bn) owed by BHP and Vale’s Samarco iron ore operations in Brazil say the company “entirely failed to negotiate” over a debt restructuring ahead of the weekend decision to seek protection from its creditors in Brazil.
Samarco has been closed since a dam wall failure shuttered its iron ore operations in 2015, killing 19 people and doing untold damage to the environment downstream.
It returned to minimal production in late 2020, amid surging iron ore prices, but as it slowly ramps up vulture funds that bought its debt – and long-suffering creditors that have not received payments on bonds for more than five years – demand that BHP and Vale tip in more cash to allow immediate repayment of overdue bonds.
On Saturday (Australian time) Samarco sought protection from having debts worth about $US8.9bn called in, according to court documents filed by the company in Brazil, a figure that would include not only external bond holders but the estimated $US4bn it owes to BHP and Vale.
In a joint statement the two mining giants said the move, similar to Chapter 11 proceedings in the US, was necessary to allow Samarco to continue operating and came after “unsuccessful attempts by Samarco to negotiate a debt restructure with these creditors”.
But one of the groups pursuing quick repayment of the debts last week told a US court Samarco it should lift a stay on freezing and discovery orders, arguing the company had “entirely failed to negotiate with its noteholders on the terms of a consensual restructuring”.
The Bank of New York Mellon (BNYM) is one of several lending groups pursuing Samarco for repayments on unsecured debt facilities that have not seen an interest or principal repayment in more than five years.
Samarco is also being pursued in Brazil by hedge fund York Global Finance BDH, which in February won rulings Samarco must repay a $US125m note that fell due in December 2020, and by the Bank of America, which has filed action chasing immediate repayments of $US200m in promissory notes.
Sources close to the discussions say that Samarco had previously offered up security over some of its assets to hold the Brazilian cases at bay, but discussions had fallen apart, which triggered its need to seek protection from creditors.
Combined the groups are seeking to freeze $US3bn worth of Samarco’s assets, with court documents filed in Brazil suggesting York and Boa are also seeking penalty interest to be imposed if immediate payment is not made.
BNYM has also sought to have a stay of its freezing application, filed late last year, lifted at a hearing to be held on April 20.
Lawyers for BNYM told a US court last week that, contrary to Samarco’s claims, they had seen no meaningful negotiations over a debt restructuring – and that the company had not even presented a business plan to its creditors, promised in November and due to be delivered by mid-February.
“Instead, Samarco has continued to drag its feet even with respect to finalising the basic agreements (such as confidentiality agreements) that must be in place before discussions can begin in earnest, failing even to respond to modest comments on those agreements that the noteholders provided as early as a month ago,” the filing said.
BNYM has asked the US court to lift a stay order preventing it from moving on Samarco’s assets, and accessing the company’s accounts as it ramps up production, saying in separate filings the company had done little to address the need to restructure its debts over the last five years since its mines were shuttered.
“At bottom, this is an unremarkable case of a debtor that wants more time to address its debts on its own timetable, notwithstanding the fact that its creditors have waited patiently for years — during which time Samarco has apparently prepared to fully resume operations, but has neglected to do anything to address the billions of dollars of debt that it owes,” the filings say.
Samarco’s operations are tipped to produce about 2 million tonnes of iron ore pellets to the end of June this year, and is expected to produce about 8 million tonnes a year in the next few years – well below the 29 million tonne a year run rate it hit before the tailings dam tragedy struck. The prospect of a drawn out administration casts a cloud over any plans for the company to further lift production, keeping global iron ore supply tight.
An English translation of Brazilian filings, seen by The Australian shows Samarco has argued the freezing orders already won in local courts could lead to the “financial strangulation” of the company, and the loss of working capital if bank accounts are frozen could again force the closure of its operations.
Sources close to the company said liquidation of Samarco could result if the Brazilian court does not approve legal protection from its lenders.
The game of high-stakes chicken between Samarco and bondholders comes after months of speculation about a deal with creditors that briefly sent the value of the unpaid debt soaring earlier this year, when Samarco’s bonds were briefly the hottest thing on the distressed debt markets in February and March.
They were worth just 34c in the dollar a year ago, but soared to more than 83c in the dollar in early March. They were still worth about 78c in the dollar this week, despite the Samarco filing for protection from its creditors with Brazilian authorities.
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