South America has been a special part of my life for four decades. I have lived many years in Brasil and Peru. I am married to an incredible lady from Argentina. I want to share South America with you.
Creditors in Brazil’s biggest corporate debt restructuring case, the R$65bn default of leading telecom operator Oi, are looking to the government for a way out after talks ground to a halt.
Few bankruptcy cases are being watched as closely around the world. Apart from the creditors, which range from international bondholders and export credit agencies to Brazil’s top six banks and Anatel, the regulator, potential acquirers are circling Oi. These include the other three big foreign-owned operators in Brazil, and Naguib Sawiris, the Egyptian billionaire.
With 138,000 direct and indirect employees, as well as operations throughout Brazil, the government sees Oi’s survival as crucial at a time when the economy is suffering its deepest recession in more than a century.
In a sign of frustration with the faltering pace of talks since June, when Oi filed for judicial reorganisation — Brazil’s version of the Chapter 11 bankruptcy procedure in the US — Anatel last week warned it might use its regulatory powers.
“Anatel is ready to intervene in Oi if necessary,” Juarez Quadros, the agency’s head, told Congress.
Oi was born from government efforts to create a national champion in telecoms, loading up on debt along the way, through deals such as a 2013 attempted merger with Portugal Telecom.
The government wanted a local operator to take on the dominant foreign rivals, among them the Brazilian subsidiaries of Telecom Italia, Mexican billionaire Carlos Slim’s América Móvil and Spain’s Telefónica.
But Oi struggled to compete, due partly to an antiquated concession system covering fixed-line operations in Brazil that required investment in universal coverage and public telephones in an age when customers prefer mobile phones.
While Brazil’s ruling coalition is studying regulatory changes to ease these requirements, the company’s first priority is to agree on debt restructuring terms with creditors, analysts say.
Bondholders are estimated to control about R$32bn of Oi’s debt, Brazilian banks R$11bn and export credit agencies R$5bn. Anatel claims it is owed more than R$20bn in fines and other charges, while the government could be owed between R$5bn and R$10bn in unpaid taxes, people involved in the talks say.
One person close to the creditors said a haircut of about two-thirds was required to reduce Oi’s debt to manageable levels.
“In the end, the pie is not that big,” he said.
Adding to the complications is that Brazilian bankruptcy law gives shareholders inordinate power in negotiations, lawyers say. Oi, whose largest shareholders include Portugal Telecom and Société Mondiale, a fund owned by Nelson Tanure, a Brazilian businessman, proposed in September a plan creditors rejected as unfavourable.
The company offered unsecured creditors such as bondholders R$10bn in convertible bonds, implying a 70 per cent writedown. Only if the company failed to pay these off would the creditors receive any equity.
Creditors said the plan gave existing shareholders all the upside. Existing shareholders could use the improved financial conditions achieved through the debt restructuring and regulatory changes to refinance the convertible bonds and redeem them, emerging with 100 per cent of their equity while creditors took a haircut.
“It leaves existing equity holders largely unimpaired,” said the so-called ad hoc group of Oi bondholders, which claims to represent about 40 per cent of note holders.
The group, whose financial adviser is Moelis & Company, said it is working on an alternative plan with other creditors. Other international lenders are being represented by FTI Consulting. Complicating the situation is a split among the creditors, with another group including Aurelius Capital Management, the hedge fund, forming a rival faction.
Oi management, for its part, has insisted it is open to creditors’ suggestions, saying it had appointed a new financial adviser, Laplace Finanças, a Brazilian firm, last week to help.
“Oi is completely interested in talking and hearing the suggestions and proposals of creditors,” Marco Schroeder, chief executive, said in an emailed statement to the FT.
He questioned the likelihood of intervention from Anatel, saying this would only be justified if there was a threat to the continuity of the company.
“Oi’s cash increased in the third quarter of this year … and there were no additional losses of customers. These factors give us reason for calm,” he said.
In the end, creditors believe, it is not just Oi that is on trial in the reorganisation, but Brazil’s bankruptcy system. Revised 10 years ago, analysts say it is better than before but still leaves shareholders holding too many of the cards, analysts say.
“If you start getting large bondholders in a bankruptcy being held hostage and subordinated to the equity, that’s going to set a terrible precedent for the country,” said one person involved in the talks for the creditors.