By Ben Bain
(Bloomberg) — When Mexico seized oil contractor Oceanografia SA a year ago over loan-fraud allegations, at least one class of creditors took solace: those with claims to Goliath, a ship worth about $245 million, or 53 percent more than what they were owed.
Now, the collapse in oil prices has all but dashed their prospects of getting repaid in full. Producers around the world are cutting drilling budgets, and the lack of demand for service ships is fueling speculation the Goliath’s value has dropped. The ship-backed bonds have sunk to just 71 cents on the dollar after reaching as high as 115 cents.
“You have to take into account the economics of the industry” after oil plunged by more than 50 percent in the past six months, said Michael Roche, a fixed-income strategist at The Seaport Group LLC.
The 591-foot-long Goliath, which has floated idle off the coast of Aruba for about 10 months, was considered Oceanografia’s most valuable asset after the seizure. The government seized the company in February 2014 after Citigroup Inc. said it was the victim of a $400 million loan fraud.
Yields on the $160 million of Goliath-backed bonds, due in 2018, have jumped to 20 percentage points over similar-maturity U.S. Treasuries. That’s twice the margin that bond investors consider “distressed.”
Jorge Betancourt, the head of investor relations at Ciudad del Carmen, Mexico-based Oceanografia, referred questions to Mexico’s Asset Transfer and Administration Service, known by its Spanish acronym SAE, which is overseeing the company on behalf of the federal government.
SAE officials didn’t respond to requests for comment on the drop in the bond prices or the operational status of Oceanografia.
Faced with the plunge in oil prices, state-owned Petroleos Mexicanos has disclosed plans to cut spending by $2 billion to $3 billion this year on purchases and contracts. Oil-services companies in Mexico have cut thousands of jobs in response to lower demand. Pemex was Oceanografia’s biggest customer.
Of the 48 Oceanografia vessels that were active in early 2014 before the seizure, all but two are now idle, after the government canceled or declined to renew contracts with the company, said a person with direct knowledge of the matter, who asked not to be identified because the figures are from internal company records.
The number of employees is down to about 1,500 from 11,000, because of cuts or attrition, the person said.
Mexico’s peso gained 0.6 percent to 14.5767 per dollar at 12:39 p.m. in New York.
On a visit to Ciudad del Carmen this month, many of the Oceanografia ships bobbed gently in the waters just offshore. They were identified by their distinctive bright-red seahorse logos.
Even though the Goliath wasn’t active for most of last year, the 2018 bonds rallied because investors were confident they could recoup their money through a quick sale of the six- year-old ship, which can accommodate 300 people.
Instead, the sale process dragged on through last year. Nordic Trustee ASA said in July that potential buyers might be concerned about the ship’s ability to operate in Mexican waters. Mexican authorities have said they planned to take legal steps to preserve the company’s rights to the Goliath. In October, the trustee announced that the brokerage firm handling the ship’s sale had been replaced.
Fredrik Lundberg, head of corporate bonds for Nordic Trustee, declined to comment for this story.
On Dec. 17, the trustee told bondholders that a buyer had yet to be found. By that time, the Organization of Petroleum Exporting Countries said they were sticking by output goals even as global supply swelled. Oil prices plummeted.
Jose Pedreira, the founder and chief investment officer of Waypoint Asset Management LLC, which oversees $65 million, lost his patience. The firm sold its Goliath-based Oceanografia notes in mid-2014, before the drop in oil prices, he said.
“Investors just got tired,” said Pedreira.
–With assistance from Adam Williams in Mexico City.
(c) 2015 Bloomberg.