Veteran investor Nelson Tanure is betting that Light SA, a Brazilian utility that filed for bankruptcy protection, will generate big gains for its shareholders even as bondholders expect to lose around half their money.

In any other country, that bet wouldn’t make much sense: usually shares of companies reorganizing in bankruptcy become worthless and creditors take over. But quirks in Brazilian restructuring law mean his wager on Light can be profitable — a playbook he’s used successfully before.   

Shareholders have the right to effectively delay the reorganization process for bankrupt Brazilian companies, giving them unusual power to pressure other investors to sustain losses.

Tanure, who in May owned less than 10% of Light, has been snatching up shares at a frantic pace, bringing his total ownership to at least a third of the company. His stake is worth 895 million reais ($189.2 million) now, as his buying spree helped boost a 73% rally in shares this year, and gains of about 316% from the lows of the year through Friday. 

Debt investors, meanwhile, see plenty to be worried about. The company proposed a plan this month for fixing its balance sheet, which may result in bondholders losing at least 60 cents on the dollar. The company’s notes have plunged, with dollar bonds due 2026 trading at about 45 cents on the dollar, down from about 84 cents at the end of last year.

“The divergence is unusual,” said Omotunde Lawal, head of emerging markets corporate debt at Barings. “One would usually expect the equity to be wiped out or severely diluted” in bankruptcy cases, she added.

Tanure, 71, has built his fortune from investing in troubled Brazilian companies. In 2016, he bought a stake in Oi SA as the telecom operator slid into bankruptcy. Around a decade ago, he bought shares of struggling oil producer PetroRio, and spent years helping to turn the company around.

He often seeks to take an active role in fixing struggling firms. With Light, he has secured a seat on the board, nominated an ally to be chairman, and is talking with creditors.

Light filed for bankruptcy protection in May, after warning that government regulators weren’t authorizing it to charge customers enough to pay its obligations. The company suffered from a series of obstacles, including the fact that more than one-quarter of the power it was sending out on the grid was being lost to theft, costing the company around $200 million a year.

The 120-year-old utility had also said it was suffering from high interest rates, customers that were delinquent on their bills, lower revenue from big clients and money set aside to pay for a court decision that forced it to return tax credits to consumers.

There is good reason for bond investors to be worried about risk with Light debt, according to Eduardo Ordonez, a debt portfolio manager at BI Asset Management in Copenhagen.

“Process/execution risk is elevated and the path to a deal may not be a straight line,” said Ordonez, who helps oversee $2 billion in emerging-market corporate bonds. “The name has been a politically sensitive one for a while owing to concession negotiations and tariff setting mechanisms.”

Even in the US, companies can sometimes emerge from bankruptcy with shares intact. For example, PG&E Corp., the parent of the Pacific Gas & Electric utility, filed for bankruptcy in 2019, weighed down by the cost of wildfire settlements. Its shareholders weren’t wiped out, because it was arguably not technically insolvent, and just faced a liquidity problem because of legal settlements.

Light’s new board of directors that includes Tanure moved to tap local investment bank BR Advisory Partners Participacoes SA to advise in talks with creditors, and negotiations with local bondholders are expected to continue in the coming weeks, according to people familiar with the matter. Other big shareholders in the utility include stock investor Ronaldo Cezar Coelho and 3G Capital Partners Ltd. billionaire co-founder Carlos Alberto Sicupira.

Still, the approval of a recovery plan may not necessarily remove “material concerns” about the credit, according to Filipe Botelho, a credit analyst at Lucror Analytics, adding that the renewal of the utility’s operating concession ahead of the deadline and at better terms isn’t a done deal.

“We see limited upside to the dollar notes currently, with risks not only from exposure to adverse restructuring terms, but also from blurry fundamentals,” said Botelho. “While unattractive for bondholders, the proposal is a first attempt and negotiations might evolve positively.”

--With assistance from Cristiane Lucchesi and Jeremy Hill.

This article was provided by Bloomberg News.