Latin America Quarterly Update July 2016
DAC Beachcroft's LatAm Quarterly Newsletter discusses topical news and issues in Latin America
Published 18 July 2016
On 20 June 2016, Rio de Janeiro-based Oi SA, Brazil’s fourth-largest telecom company, filed the largest judicial reorganisation petition in Brazil’s history, days after debt restructuring talks with creditors collapsed. The filing of Oi and six subsidiaries lists 65.4 billion reais (USD19.26 billion) in debt. The company has also filed for Chapter 15 protection in the U.S. As from the date of filing the accrual of interests, penalties, monetary correction and late charges are suspended and will only become enforceable if the judicial reorganisation becomes a bankruptcy. This is likely to trigger payments on USD14 billion of derivatives contracts that are designed to pay out upon an event of a default.
Oi's debt has been accumulating since 2009, in large part associated with the completion of two mergers, initially with Brasil Telecom and later with Portugal Telecom. The deals did not turn out well for the company, failing to generate enough cash flow to fund Oi’s investment needs. Oi operates part of Brazil’s landline phone system, which has proven onerous - the company has a legal commitment to expand and maintain the obsolete network and has incurred significant expenditure over a number of years to meet mandatory fixed-line expansion goals. By contrast, Oi has limited penetration in the mobile phone and broadband markets, the most critical and profitable segments of the telecommunications sector in Brazil. As of 31 March 2016 Oi had reported gross debt of about 50 billion reais (USD14.72 billion), about 38.9 billion reais (USD11.39 billion) of which was held by international bondholders.
Oi's shareholders have for some time resisted a proposal by creditors to convert a total of 25 billion Brazilian reais (USD7.32 billion) in debt to equity. That plan would have significantly diluted the company’s shares, handing a 95 per cent stake of the restructured business to its bondholders. Shareholders baulked at the prospect and the talks fell apart. Fitch Ratings has downgraded Oi's grade to C from CCC, well below investment grade.
The company has a free float of 49.23 per cent of its shares, while the remainder of Oi’s capital is unlisted. The company's main shareholder is Bratel BV, an investment vehicle formed by former shareholders of Portugal Telecom. The other main interested parties are Moelis, an investment bank advising about 40 per cent of international creditor investment banks, and Brazilian commercial and development banks who together hold about 30 per cent of the company's debt.
The Oi subsidiaries that also filed for bankruptcy protection were Oi Móvel, Telemar Norte Leste, Copart 4 Participações, Copart 5 Participações, Portugal Telecom International Finance and Oi Brasil Holdings Coöperatief.
The reorganisation process, which is expected to take at least two and a half years, will be supervised by the courts and a judicial trustee. Oi's board will continue to administer the company's business but will be under additional scrutiny, particularly from the creditors' committee, who no doubt will be vigilant to ensure that the duties of the company's directors and officers are observed.