Brazil has had a rough past few months to put it mildly. Ex-president Dilma Rousseff has been suspended and now faces an impeachment trial, interim president Michel Temer is embroiled in corruption allegations already, the economy is crumbling, and Rio has declared a state of “Public Calamity” putting the Olympic games in question. Now, to add insult to injury, we learn that Brazil’s fourth largest telephone company Oi SA filed the largest bankruptcy in the country’s history on Monday, Brazil is in need of a mercy rule, even as investors who have been scrambling to buy Brazilian assets in 2016 realize just how bad things really are.
After talks with creditors to restructure its debt collapsed, Oi and six subsidiaries filed for bankruptcy listing $19.26 billion in debt. In its filing, the company said it chose reorganization in order to preserve the value of its holdings and to continue to serve its customers according to the WSJ.
Oi has low penetration in the mobile phone and broadband markets, and Since 2009 the company had accumulated large amounts of debt in order to complete two mergers, first with Brasil Telecom and later with Portuguese company Portugal Telecom. As the WSJ notes, those deals failed to generate enough cash flow to fund the company’s investment needs.
CEO Bayard Gontijo resigned on June 10, and although no reason was given for Gontijo’s departure, shareholders had been putting significant pressure on the CEO to resist a proposal by creditors to convert debt into equity – a plan which according to the WSJ would have given a 95% stake of the restructured business to existing bondholders, thus significantly diluting shareholders.
As of March 31, Oi had reported gross debt in the amount of $14.72 billion, much of which was held by international bondholders. The bonds, as shown below, have been plunging over the past few months, anticipating precisely this outcome:
Debt negotiations involved Oi’s executives and main shareholder, Bratel BV which controls 22.24% of the company. Representing the creditors was investment bank Moelis & Co who is advising creditors holding roughly 40% of the outstanding bonds. Those creditors being represented by Moelis include Pacific Investment Management Co, Citadel LLC and Wellington Management Co.
Other notable shareholders include the Ontario Teacher’s Pension Plan, with a 4.77% stake; the equity arm of Brazil’s development bank, with 4.63%; and BlackRock, with .96%. Additional notable creditors include commercial banks such as Banco Itau SA Banco Santander SA, Banco do Brasil SA and Caixa Economica Federal. 5% is held by development banks such as the Brazilian Development bank and Banco do Nordeste do Brasil SA.
Just last week, Fitch downgraded Oi by two notches to C from CCC, citing an unsustainable capital structure.
As Bloomberg notes, the impact of Oi SA’s bankruptcy filing will go beyond Brazil, with the company’s euro-denominated bonds comprising 1.8% of Bank of America Merrill Lynch’s euro high-yield index by face value, the 11th-biggest issuer in the index.
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And now that the bankruptcy spigot in Brazil has been tapped, we eagerly await as the repricing of Brazil’s equities – which have soared in the past few months on empty hopes the Temer regime would magically make things better- takes place – gradually at first, then very fast.
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