Brazilian Court Set to Rule on Ship Financing

An appeals court ruling on whether a Liberian mortgage is valid for a Brazilian-owned oil production ship, due on Wednesday, could cast doubt on the future of secured lending for such vessels in the world's largest deepwater market.

The court in São Paulo is due to decide on the appeal by Nordic Trustee ASA to overturn a February ruling that the $500 million mortgage registered in Liberia is invalid for the OSX3 floating production, storage and offloading vessel, or FPSO, owned by a subsidiary of OSX Brasil SA.

The court will hold hearings on the case early on Wednesday, according to sources in the case and court documents seen by Reuters.

OSX, the shipbuilding and ship leasing arm of former billionaire Eike Batista's mining, energy and logistics empire, has been under bankruptcy protection for three years. The OSX3 FPSO is owned by OSX3 Leasing BV, the OSX Brasil unit that is also under creditor protection in the Netherlands.

The lower court's ruling favors investment bank Grupo BTG Pactual SA in an effort to recover a $28 million loan from OSX3. BTG Pactual has a lien on the FPSO and wants immediate repayment of the loan.

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, represented in this case by Nordic Trustee.

Liberia is not a member of a 1926 global treaty on ship mortgages. If the appeals court upholds the lower court's decision that the mortgage agreement is invalid in Brazil because it was registered in Liberia, it would put BTG Pactual ahead of bondholders in the queue for repayment.

BTG Pactual argues the mortgage contract is invalid because there are no links between the ship and Liberia, where it is flagged. Nordic Trustee alleges 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.

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 current ruling is affecting ongoing and future projects and financing deals, putting borrowers at risk of breaching credit terms. Lenders are 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.

São Paulo-based BTG Pactual and Nordic declined to comment, as did the law firms representing them: Tepedino, Migliori, Berezowski Advogados, and Felsberg Advogados, respectively.

UNCERTAINTY

According to São Paulo-based law firm Souza Cescon Advogados, unless the decision is reversed, the situation will create uncertainty among owners, creditors and operators of Liberian ships in Brazil.

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.

A court-appointed administrator has warned BTG Pactual that it could be held liable for the lien on OSX3 should it seek repayment before other creditors.

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."

Nordic Trustee has vowed to file a lawsuit at Brazil's Supreme Justice Tribunal, the top appeals court, should the São Paulo tribunal uphold the current ruling.