Markets Insight

Last updated: April 22, 2013 1:14 pm
Misuse of collateral creates systemic risk
Rather than reducing risk, collateral just creates different risks

Five years after the global financial crisis, collateral arrangements remain central to financial markets. They provide security for loans, structured as repurchase agreements or as mortgages or pledges of real estate or financial assets. In derivative transactions, collateral is lodged to secure current mark-to-market exposure.

Rather than reducing risk, as theory would suggest, collateral in practice creates different risks, for a number of reasons.

First, it shifts the emphasis from the borrower or counterparty’s creditworthiness to the collateral. Parties normally ineligible to borrow or transact in the first place are able to enter into transactions. Rapid growth in debt levels, derivative contract volumes and the shadow banking system (hedge funds or structured investment vehicles) are dependent on the use and availability of collateral.

Second, the security offered as collateral is not risk free, even if it is government bonds. This introduces exposure to unexpected changes in the value of the collateral. Wrong way correlation, where the underlying risk increases at the same time as the value of the collateral decreases, reduces its utility.

Third, it assumes liquid markets for the collateral, which must be realised in case of default.

Fourth, asset liability mismatches compound the risk. For example, where the loan is for a shorter maturity than the security pledged, or where collateral must be adjusted frequently over the life of the transaction.

Fifth, collateral in practice introduces significant operational and legal risk, including enforceability of security.

Sixth, the use of collateral introduces moral hazard. While lowering collateral levels decreases protection, pressure to increase business volumes may lead to inadequate collateralisation, increasing leverage.

Finally, collateral has systemic effects, altering the functioning of financial markets, especially the quantum of credit available, liquidity risk and behaviour.

Use of collateral is an important source of endogenous internally generated liquidity. The practice of rehypothecation – where collateral received is repledged to support other transactions allows expansion in leverage. But if rehypothecation is restricted, the securities committed as collateral cannot be used, causing a rapid contraction in liquidity.

Collateral use creates undesirable linkages between banks and sovereign debt, which compound crises. It encourages the creation of high quality securities that lenders are willing to lend against.

According to the Bank for International Settlements, between 1990 and 2006 triple A rated securities increased from about 20 per cent to more than 55 per cent of all securities in issue. Two-thirds of the increase was highly rated asset-backed securities, reliant on complex ratings models.

Pledging high quality assets changes priorities in bankruptcy, subordinating other lenders or counterparties to the secured creditor. Collateral also exacerbates financial distress risk, where an otherwise solvent party cannot meet unexpected margin calls. Limited disclosure of collateral provisions and potential liquidity claims makes it difficult to assess the financial position of counterparties.

Widespread collateral use exacerbates the problem of herding behaviour. In periods of stress, market participants all seek more collateral or need to sell pledged securities, increasing market instability.

Collateral use has become more entrenched, encouraged by favourable regulatory treatment. Banks rely increasingly on secured funding, including repos with central banks and covered bonds. The central counterparty, the key element of derivative market reform, is predicated on collateralisation.

Economist Hyman Minsky identified three phases of finance. Hedge financing is where income flows can meet principal and interest on debt used as finance. Speculative financing is where income flows cover interest payments but not principal, requiring debt to be continually refinanced. Ponzi finance is where income flows cover neither principal nor interest repayments, with the borrower relying on increasing asset values to service debt.

In the progression, asset prices become completely delinked from fundamental values until the structure collapses, as no one is willing to borrow or lend the required amounts to finance asset purchases. Inappropriate use of collateral is similar to this process.

Current concern focuses on whether collateral use constrains liquidity, restricting the supply of credit and the availability of sufficient suitable high quality securities. The real debate should be on the appropriateness of collateral use.

Satyajit Das is a former banker and author of Extreme Money and Traders Guns & Money

Copyright The Financial Times Limited 2013.

Apr 22, 2013

Gold Crash 2013 - Deliberately Engineered?

By Bud Conrad, Casey Research Chief Economist

How can we explain gold dropping into the $1,300 level in less than a week?

Here are some of the factors:

George Soros cut his fund holdings in the biggest gold ETF by 55% in the fourth quarter of 2012.

He was not alone: the gold holdings of GLD have contracted all year, down about 12.2% at present.

On April 9, the FOMC minutes were leaked a day early and revealed that some members were discussing slowing the Fed $85 billion per month buying of Treasuries and MBS. If the money stimulus might not last as long as thought before, the "printing" may not cause as much dollar debasement.

On April 10, Goldman Sachs warned that gold could go lower and lowered its target price. It even recommended getting out of gold.

COT Reports showed a decrease in the bullishness of large speculators this year (much more on this technical point below).

The lackluster price movement since September 2011 fatigued some speculators and trend followers.

Cyprus was rumored to need to sell some 400 million euros' worth of its gold to cover its bank bailouts. While small at only about 350,000 ounces, there was a fear that other weak European countries with too much debt and sizable gold holdings could be forced into the same action. Cyprus officials have denied the sale, so the question is still in debate, even though the market has already moved. Doug Casey believes that if weak European countries were forced to sell, the gold would mostly be absorbed by China and other sovereign Asian buyers, rather than flood the physical markets.

My opinion, looking at the list of items above, is that they are not big enough by themselves to have created such a large disruption in the gold market.

The Paper Gold Market

The paper gold market is best embodied in the futures exchanges. The prices we see quoted all day long moving up and down are taken from the latest trades of futures contracts. The CME (the old Chicago Mercantile Exchange) has a large flow of orders and provides the public with an indication of the price of gold.

The futures markets are special because very little physical commodity is exchanged; most of the trading is between buyers taking long positions against sellers taking short positions, with most contracts liquidated before final settlement and delivery. These contracts require very small amounts of margin - as little as 5% of the value of the commodity - to gain potentially large swings in the outcome of profit or loss. Thus, futures markets appear to be a speculator's paradise. But the statistics show just the opposite: 90% of traders lose their shirts. The other 10% take all the profits from the losers. More on this below.

On April 13, there were big sell orders of 400 tonnes that moved the futures market lower. Once the futures market makes a big move like that, stops can be triggered, causing it to move even more on its own. It can become a panic, where markets react more to fear than fundamentals.

Having traded in futures for over two decades, I want to provide some detail on how these leveraged markets operate. It's important to understand that the structure of the futures market allows brokers to sell positions if fluctuations cause customers to exceed their margin limits and they don't immediately deposit more money to restore their margins. When a position goes against a trader, brokers can demand that funds be deposited within 24 hours (or even sooner at the broker's discretion). If the funds don't appear, the broker can sell the position and liquidate the speculator's account. This structure can force prices to fall more than would be indicated by supply and demand fundamentals.

When I first signed up to trade futures, I was appalled at the powers the broker wrote into the contract, which included them having the power to immediately liquidate my positions at their discretion. I was also surprised at how little screening they did to ensure that I was good for whatever positions I put in place, considering the high levels of leverage they allowed me. Let me tell you that I had many cases where I was told to put up more margin or lose my positions. Those times resulted in me selling at the worst level because the market had gone against me.

The point of this is that once a market moves dramatically, there are usually stops taken out, positions liquidated, margin calls issued, and little guys like me get taken to the cleaners. Debates rage about the structure of the futures market, but my personal opinion is that a big hammer to the market by a well-heeled big player can force liquidations, increase losses, and push the momentum of the market much lower than the initial impetus would have. Thus, after a huge impact like we saw on April 13, the market will continue with enough momentum that a well-timed exit of a huge set of short positions can provide profits to the well-heeled market mover.

Moving from theory to practice, one of the most important things to keep your eye on is the Commitment of Traders (COT) report, which is issued every Friday. It details the long and the short positions of three categories of traders. The first category is called "commercials." They are dealers in the physical precious metals - for example, gold miners. The second category is called "non-commercials." They include hedge funds and large commercial banks like JP Morgan.

Non-commercials are sometimes called "large speculators." The rest are the small traders, called "non-reporting" since they are not required to identify themselves. The ones to watch are the large speculators (non-commercials), as they tend to move with the direction of the market. Individual entities could be long or short, but in combination the net position of the group is a key indicator.

The following chart shows the Price of gold as a blue line at the top, and the next panel down shows the net position of these large speculators as a black line. You can see that over the long term, they move together. When the net speculative position is above zero, this group is betting on rising gold prices. Of course, the reverse is true when it's below zero. In this 20-year view, the large speculators were holding net negative positions during the lowest point of the gold price, around the year 2000. As the price of gold rose, their positions went net long, and they profited.

An interesting thing about the chart above is that the increasing amount of net longs reversed itself before gold peaked in 2011, suggesting that these large speculators became slightly less bullish all the way back in 2010. The balance remains net long, but it remains to be seen how long that lasts.

What is not so obvious is that these large speculators are so big that they can affect the market as well as profit from it; when they initiate massive positions in a bull market, they drive the price of the futures contracts even higher. Similarly, when they remove their positions or actually go short, they can push the market lower.

So what happened a week ago was that a massive order to sell 400 tons of gold all at once hit the market. Within minutes the price plummeted, and over a two-day period resulted in the largest drop of the price for futures delivery of gold in 33 years: down $200 per ounce.

We don't have the name of the entity that did this. However, the way the gold was sold all at once suggests that the goal was not to get the best price. An investor with a position of this size should have been smart enough to use sensible trading tactics, issuing much smaller sell orders over a period of time. This would avoid swamping the market; and some of the orders would be filled at higher prices and thus generate more profit. Placing a sell order big enough to affect the overall market price suggests that someone with powerful backing wanted to drive the price of gold down.

Such an entity could have been a large speculator who already had a sizable short position and could gain by unloading some of its short position once the market momentum had driven the price even yet lower. Or it could be a central bank - one that might be happy to have the gold price move lower, as it would provide cover for its printing of more new money. Of course, it could be some entity that owned long contracts and wanted to get out of the position all at once. We don't know, but this kind of activity, resulting in the biggest drop in 30 years, raises more tan just suspicion when we consider how important the price of gold is to many markets around the globe.

Can markets really be influenced by big players? Well, was the LIBOR rate accurately reported by huge banks? Have players ever tried to corner markets? The answer to all the above, unfortunately, is yes.

There's an even bigger problem with the legal structure of the futures market: even the segregated funds on deposit can be pilfered by the broker for the brokerage's other obligations. That is what happened to MF Global customers under Mr. Corzine. (I had an account with a predecessor company called Man Financial - the "MF" in the name. I also had an account with Refco, which is now defunct. Fortunately, the daggers did not hit my account, since I was not a holder when the catastrophes occurred.) My take: the futures market is dangerous, and not a place for beginners.

One last note: after the Bankruptcy Act of 2005, the regulations support the brokers, not the investors, when there are questions of legality about losses in individual investment accounts. Casey Research will be producing a report with much more detail on this subject in the near future.

So, what now? We aren't going to see a secret memo - no smoking gun to confirm that what happened on April 13 was an attempt to affect the market. Still, the evidence is suspicious. When big entities can gain from putting on big positions, the incentives are big enough for them to try - LIBOR, Plunge Protection Team, Whale Trade, etc., all support this view.

The Physical Gold Market

Previously, there was little difference between the physical and paper markets for gold. Yes, there were premiums and delivery charges, but everybody regarded the futures market as the base quote. I believe this is changing; people don't trust the paper market as they used to.

Instead of capitulating to fear of greater losses, the demand for physical gold has hit new records. The US Mint sold a record 63,500 ounces - a whopping 2 tonnes - of gold on April 17 alone, bringing the total sales for the month to 147,000 ounces; that's more than the previous two months combined. Indian markets, which are more oriented to physical metal, now have a premium of US$150 over the futures price in Chicago. Demand at coin dealers has increased as the price has dropped. And premiums are much bigger than they were as recently as a week ago.

Here is a vendor page that quotes purchase prices and calculates the premiums on an ongoing basis. It shows premiums of 50% and more in many cases. On eBay, prices for one-ounce silver coins are $33 to $35, where the futures price is quoted as $23. A look on Friday April 19 shows one vendor out of stock on most items: 

Buy - Sell On Silver Bullion
2013 Sealed Mint Boxes Of 1 Oz. Silver American Eagles - Brand New Coins
500 Coin Min.
(1 Sealed Box)
Buy @
Spot + $1.80
Sold Out
2013 Sealed Mint Boxes Of 1 Oz. Silver American Eagles "San Francisco Mint" Brand New Coins
500 Coin Min.
(1 Sealed Box)
Buy @
Spot + $2.00
Sold Out
90% Silver Coin Bags (Our Choice Dimes Or Quarters) $1,000 Face Value Figured at 715 Ozs Per $1,000 Face
$1,000 Face
Value Min.
We Buy @
Spot + $1.70
Per Oz (Spot
+ $1.70 X 715)
Spot + $4.99 Per Oz
(Spot + $4.99 X 715)
90% Silver Coin Bags 50¢ Half Dollars $1,000 Face Value We Ship in 2 $500 Face Bags
$1,000 Face
Value Min.
We Buy @
Spot + $1.90
Per Oz (Spot
+ $1.90 X 715)
Sold Out
90% Silver Coin Bags Walking Liberty Half Dollars $1,000 Face Value We Ship in 2 $500 Face Bags
$1,000 Face
Value Min.
We Buy @
Spot + $2.10 Per Oz (Spot
+ $2.10 X 715)
Sold Out
Amark 1 Oz. Silver Rounds ( Made By Sunshine ) Pure .999 BU
500 Coin Min.
Buy @
Spot -15c
Sold Out

Clearly, the physical gold market today is sending different signals than the paper market.

The Case for Gold Is Still with Us

The long-term fundamental reasons to hold gold are undeniably still with us. The central banks of the world are acting in concert in "currency wars" or "the race to debase." As they print more money, the purchasing power of each unit declines. They are caught between the rock of having to keep interest rates low to support their governments' huge deficits and the hard place of the long-term effect of diluting their currency. If rates rise, even First World governments will be forced to pay higher interest fees, leading to loss of confidence in their ability to pay back their debt, which will bring on a sovereign debt crisis like what we have seen in the PIIGS or Argentina recently.

The following chart shows the rapid growth in the balance sheets as a ratio to GDP for the three largest central Banks. I've extrapolated the expected growth into the future based on the rate at which they propose to buy up assets. One could argue about how long these growth rates will continue, but the incentives are all there for all central banks to bail out their governments and their commercial banks. I fully expect the printing game to continue to provide the fuel for hard-asset investments like gold and silver to increase in price in the years to come.

(Click HERE to enlarge)

Buying Opportunity or Time to Flee?

So what does it all mean? The paper price of gold crashed to $1,325 in the wake of this huge trade. It is now hovering around $1,400. My first reaction is to suggest that this is only an aberration, and that the fundamentals of the depreciating value of paper currencies will eventually take the price of gold much higher, making it a buying opportunity. But what I can't predict is whether big players might again deliver short-term downturns to the market. The momentum in the futures market can make swings surprisingly larger than the fundamentals of currency valuation would suggest.

Traders will be looking for a significant turnaround to the upside in price before entering long positions. However, a long-term, fundamentals-based trader has to look at the low price as a buying opportunity. I can't prove it, but I think the fundamentals will drive the long-term market more than these short-term events.

The fight between pricing from the physical market for bullion and that from the "paper market" of futures is showing signs of discrimination and disagreement, as the physical market is booming, while prices set by futures are seemingly pressured to go nowhere.
In short, I think this is a strong buying opportunity.

April 21, 2013 4:19 pm

Brazil: The creaking champions
The boom has peaked, putting a strain on companies that enjoyed support from the state
Oil rig floating of Rio de Janeiro
Troubled waters: OGX, an oil start-up, has lost nearly 90 per cent of its share value over the past year

In 2010, when 60 Minutes came to Brazil to do a piece on the “World’s Next Economic Superpower”, the US television programme chose Eike Batista as the ambassador for the country.
“You know, in the last 16 years, Brazil has put its act together. This is it. Hello, time for Americans to wake up,” Mr Batista said with trademark brashness.

In retrospect, the discovery by primetime TV of Brazil’s economy should itself have been a sell signal for investors that a long boom in Latin America’s biggest economy, fuelled by high commodity prices and credit, was peaking.
It was also a high-water mark for Mr Batista. In only a few years he had amassed a paper fortune that until last year was estimated by Forbes to be worth about $30bn through the listing of his X group of mostly start-up companies. This year, the bubble surrounding the group burst after his oil and gas explorer, OGX, repeatedly fell short of production targets, sending his wealth plummeting to about $11bn in March.

Although its fall from grace has been the most dramatic, Mr Batista’s X group is just one of a number of Braziliannational champions” – large private and state-controlled companies that have been big recipients of subsidised state credit – that are in retreat with the end of the country’s rapid economic growth and the global commodity super cycle. They include Petrobras, the state oil company, Vale, the world’s largest iron ore miner, and even the institution that bankrolled themBNDES, Brazil’s development bank.

The travails of Brazil’s largest companies are an alarm bell, if any were needed, of the limitations of a Chinese-style model of the state picking corporate winners.

A member of the Brics group of emerging nations that also included Russia, India and China, Brazil was last year one of the slowest growing large economies in the world, expanding less tan 1 per cent compared with 7.5 per cent in 2010. Critics of President Dilma Rousseff say Brazil needs to revisit the type of big bang reforms that began under former President Fernando Henrique Cardoso during the 1990s, when the country tamed inflation and privatised state-owned enterprises.

They say Ms Rousseff, who faces elections next year, needs to put precious investment dollars to better use, such as in infrastructure, if she is to revive an economy still recovering from the excesses of her predecessor, Luiz Inácio Lula da Silva. She needs to restore competitiveness if Brazil is to avoid losing market share even in core sectors, such as agriculture, to new producers, such as in Africa.

“If you look at the Brazilian national champions they are getting whacked,” says Chris Garman, an analyst with Eurasia Group. “The government’s focus is shifting.”

It was not until the mid-2000s, as Brazil’s economy gained steam on the back of rising commodity exports to China, that Mr Lula da Silva, a former unionist firebrand who took office in 2003, embarked on a new phase in creating local corporate heroes. Using BNDES, the government pumped money into meatpacker JBS, enabling it to go on an overseas buying spree that eventually created the world’s largest beef producer by sales. 

Petrobras was anointed sole operator of Brazil’s giant new offshore oil discoveries and embarked on the world’s biggest corporate capital expenditure plan, worth more than $200bn in five years, with orders to use locally produced equipment. Next came Mr Batista’s companies, pulp and paper groups and others.
Mr Batista started building what he claimed would be the largest port in the Americas, Porto do Açu, in Rio de Janeiro state, to serve the oilfields off the southeast coast of Brazil.

He listed OGX, his oil start-up, in 2008, and it remains the flagship of his empire even though it is increasingly unclear how much of its “net potential resources” of 10.8bn barrels of oil equivalent will be recoverable. He also created OSX, an oil services company to build equipment and platforms; MPX, an energy company; and CCX, a Colombian coal company.

The “X” in the names of his companies was supposed to signify their potential multiple returns. But misfortune struck first on the home front, when his son Thor killed a cyclist last year while driving the family’s Mercedes-Benz McLaren sports car.

Soon thereafter, doubts began to emerge about OGX’s performance after disappointing results from its first wells. In the past year it has lost nearly 90 per cent of its share value, sparking a crisis of confidence in the group. Mr Batista has been forced to offload control of his energy company, MPX, to Germany’s Eon. He had to enlist the help of influential Brazilian financier André Esteves, whose bank BTG Pactual, has extended him a $1bn credit line, and to privatise LLX, the logistics arm that owns Açu as well as CCX, among other measures.

Mr Batista’s story fits into the broad model of Brazilian financial history, says Aldo Musacchio, associate professor at Harvard Business School, who is releasing a book, Leviathan Evolving , about state capitalism in Brazil and elsewhere. During each commodity boom, Brazil prospers, leading investors to believe the old story that the “country of the future” is about to materialise. “OGX was one of those stocks people chose to bet on, the bet was on Brazil but they chose to do it through OGX,” he says.

Along the way, the government also bought into Mr Batista’s sales pitch. Although BNDES does not break down its loan portfolio by company, it has lent Mr Batista’s companies more than R$6bn ($3bn) while another state-owned bank Caixa has contributed R$2.2bn, according to estimates by Valor Economico, a newspaper.

. . .
Like OGX, Petrobras’s honeymoon under Mr Lula da Silva also proved shortlived as it increasingly became a tool of government policy. Last year, it reported its first quarterly loss in 13 years and announced the sale of assets in the Mexican Gulf as it struggles to raise cash under a government policy of keeping petrol pump prices low in Brazil to control inflation.

Brazil has always had some form of state capitalism ... but one big change is the government using enterprises as a mechanism to try to influence markets,” says Sergio G. Lazzarini of the Insper Institute of Education and Research and co-author of a report comparing Petrobras with foreign state-run oil majors.
The report shows how Petrobras’s policies as a national champion, such as its requirement to use local content, often run counter to its own and its minority shareholders’ financial interests.
While Mr Batista and Petrobras have been affected by market sentiment and government intervention, Vale has suffered from a softer iron ore price and a troubled overseas expansion. The company announced it was suspending its involvement in Simandou, Guinea, after alleged irregularities in a large iron ore project in the west African nation. It has also put on hold an $11bn potash project in Argentina amid a fight with the government there.

Alberto Weisser, chief executive of Bunge, the biggest agricultural trader and processor in South America, says Brazil has become too expensive and has lost its competitive edge. “This is coming from many years of under-investment, especially in infrastructure. There has been too much government intervention,” Mr Weisser said at the FT Global Commodities Summit. “But we are starting to see the right incentives now: there’s a lot of privatisation, especially in ports, railways, logistics. It’s probably 10 years late, but it’s happening.”

To be sure, some Brazilian national champions are doing well. The international expansion of JBS, 23 per cent-owned by the equity arm of BNDES, into the US and Australia at the height of the boom remains intact. And Embraer, the world’s third largest aircraft manufacturer and a recipient of BNDES largesse, is surviving tough times in civil aviation. Nor has Brazil Inc disappeared from the global stage. Brazilian billionaire financier Jorge Paulo Lemann, now the country’s richest man with his large stake in brewer Anheuser-Busch InBev, recently grabbed headlines when he and his partners joined with Warren Buffett to buy Heinz in the US.

Yet, the travails of the larger champions and of BNDES itself are leading many to wonder if the age of picking winners is coming to an end. BNDES has more than doubled its assets since 2008 to R$716bn last year, a rise matched by state-run mortgage bank Caixa. In a shock move, however, BNDES and Caixa were downgraded two notches by Moody’s Investors Service last month, which cited concerns that they had become too heavily exposed to their biggest borrowers. BNDES had lent more than four times the value of its tier one capital to its top 10 clients.

In addition, there are questions over the effectiveness of using a development bank to support large companies. Prof Musacchio says BNDES was among the most profitable of the world’s development banks, at least partly because it was cherry-picking the best credits in the economy. By providing them with subsidised credit, it was undermining the potential role of private banks in the economy.

These loans often tended to bepro-cyclical” – mining and oil companies received disbursements during a commodity supercycle when arguably BNDES should have been giving more help to other parts of the economy.

. . .
The bank normally counters that it does not select champions but simply good borrowers. It says with some justification that it ends up lending to the largest companies because it is the main source of long-term finance in Brazil’s economy. Given the country’s high interest rates, a legacy of inflation, private banks are often unwilling to provide longer-duration loans at reasonable rates. Whatever the case, there are signs that BNDES and the government are drifting away from the flag-waving policies of the boom years to more practical matters. With Brazil’s economy slowing and the country in need of new airports, roads and rail links to host the football World Cup next year and the Olympic Games two years later, the focus of BNDES is changing to infrastructure, analysts say.

“The BNDES is working very hard to really get into these infrastructure projects hand in hand with the private sector and, in particular, with capital markets,” says Joaquim Levy of Bradesco Asset Management and a former national treasury secretary.

So what of Mr Batista and his troubled X group? Help is on the way, albeit from another national champion. Petrobras said it was looking at using his Açu port for its oil fleet.

“This is business, not aid,” Maria das Graças Foster, Petrobras chief executive, insists.
Perhaps, but if there is one thing worse for a government than building national champions, it is watching them fall. Mr Batista may have achieved an enviable status – that of being too big to fail.

The cash cow sucking up money

After a spate of lousy news since last year, when his oil company first missed its production targets, Eike Batista must have thought things could not get worse. But this month they did.

OGX was forced to shut down all three of its production wells in the Tubarao Azul field, its only source of crude, because of damage to two submersible pumps. Repairs on the first well will not be completed until mid-May and those on the second will only start after that.

OGX’s tough times come amid no shortage of bad news in the wider Brazilian corporate landscape, with losses at some companies of historic proportions.

The country’s second-biggest airline Gol reported a loss last year of R$1.5bn, which it blamed on rising competition and high fuel prices, and electricity company Eletrobrás booked a $3.4bn loss after the government renegotiated its power concessions.

But while most of corporate Brazil is going through a cyclical downturn, with some consumer companies still doing well even as banks, commodity companies and others are muddling through, Mr Batista’s troubles seem to be far more serious.

Part of the problem is that OGX, which was supposed to be the cash cow of his X group, is a start-up company in one of the most risky and capital-intensive endeavours possible: oil exploration and production.

The Brazilian market has little experience of such volatile companies and has meted out harsh punishment to OGX’s every wayward move. “This is a unique company in a sense,” says Ana Paula Ares, an analyst at Fitch. “There are not many comparable companies because this is a start-up.”

Analysts say OGX has $1.6bn in cash and about the same amount in capital expenditure and other expenses this year. The concern is whether it can maintain enough of a cash cushion to ensure investor confidence. It will probably have to draw on a $1bn put option provided by Mr Batista himself and perhaps sell a share in its fields to raise extra cash.

Cash flow projections for OGX are weaker than prior projections, despite the benefit of a favourable oil price environment and relatively high realised prices on OGX’s production,” Moody’s analyst Gretchen French said.

EBX, Mr Batista’s holding company, says the group has sufficient capital resource to execute its projects, which are proceeding according to their business plans.

OGX is due to begin production from another field, Tubarao Martelo, at the end of the year. Mr Batista will be hoping that this time his luck might finally change.

Copyright The Financial Times Limited 2013.