Oi bankruptcy spotlights Brazil’s debt woes

June 21, 2016

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Shares in telecom operator were temporarily suspended from trading on Tuesday, one day after the former national champion filed the country’s largest ever request for bankruptcy protection.

Oi’s move to on R$65bn of debt comes at a particularly sensitive time for Latin America’s largest economy. A series of heavily leveraged groups are seeking to restructure their loans amid what is expected to be the country’s deepest recession in a century.

“It’s a nightmare scenario driven by macroeconomic factors and it is pushing our Brazil corporate portfolio into non-investment grade,” said Daniel Kastholm, Fitch Ratings regional group head for Latin America corporate finance.

Brazil’s economy has been beset by a perfect storm: the end of a commodities supercycle and the falling oil price have coincided with what critics say was economic mismanagement by leftwing President Dilma Rousseff that has deterred investors and led to a fiscal crisis.

The downturn, in which gross domestic product contracted by nearly 4 per cent last year and is expected to do so again in 2016, has been compounded by political uncertainty, with Ms Rousseff suspended while she is being impeached by the senate.

The slowdown has hit the most vulnerable Brazilian companies particularly hard. Among those struggling are groups that loaded up on debt during the boom and those that have become involved in a sweeping corruption scandal affecting state-owned oil company, .

The country’s second-largest airline, Aéreas Inteligentes, is trying to negotiate a $780m debt swap with creditors while steelmaker de Minas Gerais, known as Usminas, is also seeking a restructuring.

Others, such as Petrobras, the world’s largest emerging market corporate debtor with R$450bn in gross debt, are balancing on the edge, with analysts divided on whether it will need recapitalisation.

Analysts said the situation was more difficult than Brazil’s last liquidity crunch during the global financial crisis.

“The scenario was also similarly difficult in 2008 but the difference is that then the [Brazilian] government and banks were offering credit, providing liquidity,” says Ricardo Carvalho, an analyst at Fitch Ratings.

Oi, which is also the country’s fourth biggest mobile operator, on Monday filed for “judicial recuperation”, Brazil’s version of the Chapter 11 procedure of the US, after earlier restructuring talks with creditors failed.

The company had previously with LetterOne, an investment fund owned by Russian billionaire Mikhail Fridman, to merge with rival Tim, Telecom Italia’s Brazilian subsidiary. L1 Technology, a LetterOne business unit, had offered $4bn to support the merger but abandoned the talks after it said Tim had said it was not interested.

Oi said on Tuesday its shares had been suspended during morning trade and withdrawn from stock market indices on São Paulo’s BM&FBovespa market.

Most of Oi’s financial creditors are foreign bondholders with 66 per cent of its debt while state banks and export credit agencies hold 19 per cent, commercial banks 7 per cent and local bondholders 8 per cent.

The company’s problems stem from debt accrued from mergers and acquisitions as well as the heavy capital expenditure required to meet mandatory goals for the expansion of its fixed line network.

Credit Suisse calculated that the only way the company would be able to turn its free cash flow positive by next year is if it achieved a 65 per cent reduction in its gross debt through a combined haircut and debt-to-equity swap.

“Given the uncertain political scenario, large debt renegotiations have become extremely complex because such agreements need to be based on mid and long-term macroeconomic forecasts,” says Bruno Caraciolo at De Faro Caraciolo Advogados law firm in São Paulo. “As such, it’s reasonable to expect that we’ll see more requests for bankruptcy protection from large debtors over the next few months, especially those that are more dependent on the public sector.”

Fitch’s Mr Kastholm said the downgrading of Brazil sovereign rating to non-investment grade was pushing much of the corporate portfolio into junk status.

But individual companies and industries had their own issues, he added, characterising different sectors as the “good, the bad and the ugly”.

Included in his “ugly” list were airlines, which have suffered a fall in passengers and some steel companies. Usiminas, for example, which supplies flat steel for automakers and home appliances, has struggled with rising steel imports and a collapse in demand for cars. A bitter boardroom battle between its main shareholders has also hurt the company.

Usiminas is hoping to raise as much as R$1bn in a capital injection plan that is expected to be finalised by Thursday. Last week, it said it had already raised more R$800m.

Mr Kastholm’s “bad” list included oil and construction companies affected by the Petrobras investigation, while the “good” list included pulp and paper companies that were benefiting from greater exports with the weakening of the real.

“It’s a cash flow crisis. Companies have responded like you would expect. They have cut capital expenditure, cut fat. The issue now is it’s starting to get down to the bone,” said Mr Kastholm.

Category: Oil & Gas