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Brazilian telecommunications operator Oi has filed the country’s biggest bankruptcy protection request, weighed down by R$65.4bn (US$19.2bn) of debt and a flagging economy.
The move on Monday by the country’s largest fixed-line and fourth-biggest mobile operator to file for “judicial recuperation” — Brazil’s version of the Chapter 11 procedure of the US — followed the failure of restructuring talks with creditors. Its shares closed down 10 per cent at R$0.99.
“The request for recuperation was taken because of the obstacles confronted by the company management in trying to find a viable alternative with creditors,” the company said in a statement to shareholders.
The failure of Oi comes as corporate Brazil is struggling with what is expected to be the nation’s worst recession in more than a century, with heavily indebted companies coming under increasing pressure.
Aside from Oi, the country’s second-largest airline, Gol Linhas Aéreas Inteligentes, is trying to negotiate a $780m debt swap with creditors while steelmaker Usinas Siderurgicas de Minas Gerais is also seeking a restructuring.
Fitch Ratings said in a note that without a substantial restructuring, bankruptcy was inevitable for Oi, which would use most of its cash just to meet this year’s debt repayments.
“As of March 31 2016, the company’s cash balance was R$8.4bn against gross short-term debt of R$8.1bn,” the rating agency said.
Oi was regarded as one of Brazil’s “national champions” when it was formed eight years ago from a merger partially funded by the state under leftwing former president Luiz Inácio Lula da Silva.
During his government and that of his successor, Dilma Rousseff, who is facing impeachment by Brazil’s senate for allegedly manipulating the budget, BNDES, the state development bank, helped fund champions in sectors that also included meatpacking and pulp and paper.
The request for recuperation was taken because of the obstacles confronted by the company management in trying to find a viable alternative with creditors
Oi’s net revenues were expected to decline 3.6 per cent this year against a year earlier to R$25.5bn, compounding a similar decline in 2015, according to Credit Suisse.
BNDES’s equities arm, BNDESPAR, still has a near 5 per cent stake in Oi while the bank remains a key lender, with state banks and export credit agencies holding 19 per cent of the telecom operator’s financial debt, according to Credit Suisse.
However, most of Oi’s financial creditors are foreign bondholders with 66 per cent of its debt, while commercial banks hold 7 per cent and local bondholders 8 per cent.
The company’s problems stem from debt accrued from the heavy capital expenditure required to meet mandatory goals for the expansion of its fixed-line network, and from mergers and acquisitions.
Credit Suisse calculated that only with a 65 per cent reduction in its gross debt through a combined haircut and debt-to-equity swap, would the company be able to turn free cash flow positive by next year.
The company said it would sustain normal operations during the judicial recuperation process. “Oi will do its utmost to maintain its normal commercial, operational and administrative activities,” it said. “Oi will maintain its focus on investment in structurally important projects.”