Oi files for Brazil’s biggest ever bankruptcy protection

By Guillermo Parra-Bernal and Ana Mano

SAO PAULO (Reuters) – Oi SA filed for Brazil’s largest ever bankruptcy protection on Monday after the country’s No. 1 fixed-line phone carrier ran out of time to reorganize operations and restructure 65.4 billion reais ($19.3 billion) of debt amid a harsh recession.

The petition for bankruptcy protection from Oi, Brazil’s fourth-biggest mobile provider, and six subsidiaries came after talks with creditors ground to a halt earlier this month ahead of a July debt payment.

Oi’s bankruptcy filing – the equivalent of Chapter 11 in the United States – comes after a record number of Brazilian companies filed for court protection from creditors in 2015 as Latin America’s largest economy plunged into a recession not seen in eight decades.

Brazil’s economic woes exacerbated Oi’s struggle with mounting competition in mobile and data, spiraling debt and its burden of mandatory fixed-line expansion goals after its state-sponsored merger eight years ago.

Brazil’s political crisis may have also harmed Oi, delaying an overhaul of industry rules that could have helped the company and encouraged the company’s almost 200 bondholders to give it more time to renegotiate debt, analysts said.

The decision to file for bankruptcy came two months after Oi and several creditors began talks to restructure about 50 billion reais in debt owed to banks and bondholders. Talks collapsed after key shareholders balked at the prospect that an accord with creditors would dramatically cut their stakes, sources told Reuters at the time.

In a securities filing, Oi said the petition to seek protection from creditors in a Rio de Janeiro court stemmed from “obstacles confronted by management to finding a viable alternative with creditors.”

Concern over a looming bankruptcy plan increased on June 10 when Chief Executive Officer Bayard Gontijo quit after a majority of the company’s board opposed the direction of restructuring talks. One of those shareholders, Pharol SGPS SA, criticized Gontijo’s support for a creditor proposal that would give them a 95 percent stake in Oi.

“As anticipated, negotiations did not lead to any agreement between the parties, and investors were waiting for Oi’s next move,” said Paolo Gorgó, an Italy-based investor specializing in distressed debt cases.

Last week, Oi warned that, without a debt restructuring, 92 percent of existing cash would be depleted by year-end, making operations “unsustainable.”

A source with direct knowledge of the decision told Reuters on Monday that the company is confident industry watchdog Anatel will keep Oi’s operating license throughout the process. Oi plans to maintain the highest service quality standards during the process, the same source added.

Oi, Brazil’s only carrier controlled by domestic capital, declined to comment beyond the petition. In a separate statement, Brazil’s Communications, Science and Technology Ministry said that Oi’s bankruptcy filing will accelerate discussions to revisit industry rules, without mentioning the license issue.

Another source told Reuters that bondholders already negotiating with Oi were not warned about the company’s decision to seek court protection. Earlier this year, those creditors had formed a group that was being advised by Moelis & Co.

JULY MATURITY

Nonvoting shares of Oi slumped 10 percent on Monday as the approaching deadlines for debt repayments added to fears that the company could default or seek bankruptcy protection in the middle of the debt restructuring.

The Oi subsidiaries that also filed for bankruptcy protection were Oi Móvel SA, Telemar Norte Leste SA, Copart 4 Participações SA, Copart 5 Participações SA, Portugal Telecom International Finance BV and Oi Brasil Holdings Coöperatief UA.

Analysts said that Oi’s debt was unsustainable in the short term, with almost half of it maturing by the end of 2017. Debt-servicing also posed a challenge for Oi, whose debt is 75 percent denominated in currencies other than the Brazilian real – which fell 16 percent against the U.S. dollar in the past two years.

Especially challenging was the maturity of 230 million euros ($260 million) in bonds of Portugal Telecom International, scheduled for July.

According to the first source, who requested anonymity because of the sensitivity of the situation, the request for creditor protection stemmed from what the company perceived as an inability to implement the necessary steps to exchange existing bonds for new ones and issue equity for creditors.

At the same time, creditors whose positions in credit default swaps tied to the Portugal telecom International notes surpassed their bondholdings by a large margin had an incentive to disrupt talks or trigger a default, the source said.

Oi has almost 200 different bondholders spanning from Brazil and the United States to Switzerland and Chile

Newspaper O Estado de S. Paulo reported on Monday that Oi had hired law firm Galdino, Coelho, Mendes Advogados to help draft a possible bankruptcy protection filing.

A Oi spokeswoman declined to comment on the reported hiring of Galdino as adviser. The law firm did not immediately comment.

(Additional reporting by Tatiana Bautzer, Brad Haynes and Priscila Jordao in São Paulo; Editing by Leslie Adler)