NEW YORK, April 7 (IFR) - Continued speculation about the financial viability of Brazil's Schahin Oil & Gas prompted another selloff Tuesday in the company's bonds due 2022.
The slump in the company's approximately US$651m outstanding 5.875% 2022s began on Monday following unconfirmed media reports that the issuer was expected to file for court protection in Brazil.
The bonds, backed by charter payments from a single drillship called Sertao, were being quoted as low as 39.00-41.00 earlier Tuesday, adding another 10 point drop to Monday's 10 point plunge.
News Monday that Petrobras would halt five drilling rigs under contract to Schahin then added to concerns that Petrobras could exercise early termination clauses triggered by a bankruptcy or performance issues.
And on Tuesday, talk emerged that the company had already brought the Sertao drillship onshore, raising further concerns among investors over the asset that backs the bond.
"Schahin has been struggling for a while," said a Brazil-based analyst. "The only thing that has stopped the bonds from trading down to the 20s was the collateral. I think this view will be reassessed if the company files for bankruptcy."
Without those payment flows from the charter and service agreements on the Sertao drillship, holders of the 2022s will essentially be forced to lean on the value of the underlying drillship to be made whole.
Prices are now well below the recent low of 56.00 seen in early February when Moody's cut to junk senior secured bonds issued by oil services companies - including Schahin Oil and Gas's 2022s - which rely on offshore charters with embattled state-controlled oil company Petrobras.
A media representative for the company declined to comment on such talk or any recent reports regarding possible bankruptcy filings.
The fall from grace for Schahin has been exacerbated by this year's slump in crude oil prices which in turn reduced demand for offshore oil vessels, not to mention any potential price on the vessel should it come to a fire sale.
"The oil market has gone through a shakeup and day rates are going lower," said a New York based banker.
The company has been on investors' watch list ever since a widening list of Brazilian entities came under formal investigation into alleged kickbacks at Petrobras.
In early March, Petrobras banned the company's engineering unit Schahin Engenharia from bidding for contracts after allegations that it too was involved in the corruption scandal.
In 2013, Schahin Oil and Gas tried but failed to sell a seven-year non-call four bond through Citigroup, Deutsche Bank, HSBC and Mizuho. As a result the company was forced to take out bridge financing to meet short-term needs, including a US$460m with Mizuho Bank, which falls due in October 2015, according to Fitch.
The 2022s were originally issued in 2012 through Nomura, Morgan Stanley, Deutsche Bank and Mizuho Securities. (Reporting By Paul Kilby; Editing Shankar Ramakrishnan)