Brazil's Lupatech Share Surge May be Unwarranted

 A 39 percent surge in shares of Lupatech SA, a Brazilian oil equipment company coming out of bankruptcy, is not justified by the terms of a recent restructuring and capital increase, traders and investors told Reuters.

Lupatech, which traded at 26 centavos before a debt restructuring plan was approved last week, closed at 36 centavos on Tuesday, five sessions after announcing the plan that helped cut debt by more than two-thirds but gave the company little or no new cash for investment.

During the period, Lupatech stock rose as high as 63 centavos and volume soared. More than one-fifth of the shares were traded through XP Investimentos, a Brazilian brokerage popular with retail investors.

At Tuesday's close, the share price was 38 percent above the 26 centavos at which investors can buy Lupatech if they purchase a option valued at 1 centavo, said a trader at a São Paulo-based hedge fund.

"Why would anyone pay 36, 40 or even 60 centavos for Lupatech, when you can buy it for 26 centavos," said the trader, who requested anonymity to comply with the fund's policies. "Worse, under the restructuring, current shareholders are going to be heavily diluted."

Lupatech ran into trouble after borrowing heavily to meet new national oil-industry content rules only to see capital-intensive projects to build flow-control equipment delayed. Its restructuring was approved by 95 percent of creditors.

Under the restructuring, two-thirds of the new capital will go to creditors such as Brazil's state-owned development bank BNDES and bondholders. Existing shareholders can buy the remaining one-third but nearly all of that cash will go to creditors.

Lupatech's recovery will only begin in December, at the earliest, when new shareholders take charge, a source directly involved with the restructuring process told Reuters.

An investor betting the stock will keep falling said his hedge fund valued Lupatech at 2 centavos, even after the restructuring. So-called short sellers borrow stock and sell it, seeking profit by buying it back later at a lower price.

The price jump may be due to a "short squeeze," or when short sellers must buy Lupatech at a loss when bets expire before they make a profit.

"We're shorting, but the current value is ridiculous," said Antonio Bueno, who oversees 80 million reais in assets ($35 million) at Ujay Capital. "We're betting against Lupatech because it has no new capital and dilution will hurt existing shareholders."

($1 = 2.23 Brazilian reais)

(By Jeb Blount, Editing by Guillermo Parra-Bernal in Sao Paulo and Jeffrey Benkoe)