A Brazilian appeals court has ruled that a Liberian mortgage is invalid for a Brazilian-owned oil production ship, sources with direct knowledge of the matter said on Wednesday, casting further doubt over the future of secured lending for such vessels in the world’s largest deepwater market.
The court in São Paulo upheld a February ruling voiding the use of a $500 million mortgage registered in Liberia for the OSX3 floating production, storage and offloading vessel, or FPSO, owned by a unit of OSX Brasil SA, said the sources, who requested anonymity since the decision has not been made public.
A spokeswoman for the court declined to confirm the ruling before it is published.
OSX Brasil, the shipbuilding arm of former billionaire Eike Batista’s mining, energy and logistics empire, has been under bankruptcy protection in Brazil for three years. The FPSO is owned by OSX3 Leasing BV unit, which is also under creditor protection in the Netherlands.
Wednesday’s ruling favors investment bank Grupo BTG Pactual SA in an effort to obtain immediate repayment on a $28 million loan from OSX3. Bondholders in OSX3, represented by Nordic Trustee ASA, had asked the court to reverse the earlier ruling, which broke their right to claim repayment first if OSX3 declared bankruptcy.
BTG Pactual also has a lien on the FPSO.
The case underscores the extent to which loopholes in Brazil’s bankruptcy protection laws and their interpretation by courts could stall secured lending for offshore oil vessels, complicating development of Brazil’s deepwater fields.
According to London-based law firm Norton Rose Fulbright LLP, the lower court’s ruling was affecting ongoing and future projects and financing deals, putting borrowers at risk of breaching credit terms. Lenders were ordering foreign-flagged ships operating in Brazil to reflag in countries that are signatories of the treaty, such as Panama.
“This has become a big issue for banks, since they thought they would be given priority in the line of repayment under the contractual structures in place,” said Andrew Haynes, partner at Norton Rose’s Rio de Janeiro office. He has no involvement in the case.
According to São Paulo-based law firm Souza Cescon Advogados, the appeals court’s failure to reverse the earlier decision will keep creating uncertainty among owners, creditors and operators of Liberian ships in Brazil.
Lawyers for Nordic Trustee are considering filing a lawsuit at Brazil’s Supreme Justice Tribunal, the top appeals court, said one of the sources. Felsberg Advogados, a law firm representing Nordic, declined to comment.
São Paulo-based BTG Pactual and law firm Tepedino, Migliori & Berezowski Advogados declined to comment.
FPSOs are oil tankers converted to collect and process oil from deepwater fields and then unload it to other tankers that ship the output to shore. Apart from OSX3, other Liberian-registered FPSOs in Brazil include FPSO Polvo, FPSO Marlim Sul and FPSO Cidade de Mangaratiba, Thomson Reuters data showed.
International law would normally give precedence to the mortgage holders in bankruptcy proceedings. In this case, the mortgage was given as collateral to OSX bondholders.
A court-appointed administrator in the Netherlands has warned BTG Pactual that it could be held liable for the lien on OSX3 should it seek repayment before other creditors.
BTG Pactual had said the mortgage contract was invalid because there are no links between the ship and Liberia, where it is flagged. Liberia is not a member of a 1926 global treaty on ship mortgages. Nordic Trustee alleged that none of the 142 Liberian-flagged ships that operate in Brazilian waters have locally registered mortgages.
Ship owners “flag,” or register, their vessels in countries such as Liberia and Panama to avoid regulations, taxes and obligations that come with owning a ship in larger countries such as Brazil or the United States.
A year ago, a São Paulo court ordered the OSX3 FPSO be sold to repay creditors after BTG Pactual won an injunction. However, bondholders challenged the order, saying they had priority over BTG Pactual because OSX Leasing gave the mortgage as collateral.
Nordic Trustee’s lawyers said the prior rulings declaring Liberian mortgages void in Brazil could have a ripple effect within the industry, noting in one of the documents that “the court is ignoring widely followed principles of maritime law.”