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Fitch Affirms Oi Ratings at 'BBB-' Following PT Merger Announcement



  Fitch Affirms Oi Ratings at 'BBB-' Following PT Merger Announcement

Business Wire

MONTERREY, Mexico -- October 3, 2013

Fitch Ratings affirmed the foreign and local currency Issuer Default Ratings
(IDRs) of Oi S.A. (Oi) at 'BBB-' and the National Scale Rating at 'AA+(bra)',
including the senior notes and local debenture issuances following the
announcement by Oi and Portugal Telecom SGPS SA (PT; 'BBB-', Negative Outlook
by Fitch) to merge its operations. The Rating Outlook remains Negative. The
transaction is expected to be concluded during the second quarter of 2014 once
it clears approval from each board of directors and authorities from each
country as well as creditors. A full list of rating actions follows at the end
of this release.

KEY RATINGS DRIVERS

In Fitch's opinion, the merger brings to the resulting entity a larger scale,
geographical diversification, relevant potential for synergies, both
operational and financial, and slightly less net leverage when both operations
are combined. Shareholders of PT and Oi will receive shares in a new entity
CorpCo, which will consolidate PT and Oi. Going forward, CorpCo will have a
single class of shares and its shareholder structure should simplify, once
Telemar Participacoes S.A. (TMARPART; Oi's controlling entity) ceases to
exist. Furthermore, Oi shareholders should increase capital by a target of
BRL8 billion of which BRL3.5 billion will be used to increase the cash
position on the new company.

The new combined entity had net revenues and EBITDA of approximately BRL37.5
billion and BRL12.8 billion during 2012; of which approximately 70% of EBITDA
comes from Brazil. Pro froma the merger, revenue mix is expected to be
composed of 32% from residential services, 33% mobility, 30%
business/corporate services and 5% from wholesale and other services. Net
Leverage is projected to be close to 3.5 times (x) and should decrease to 3.2x
taking into account the cash effect of the capital increase. The company has
indicated that debt of the combined entity will rank pari pasu. Current
dividend policy by Oi of paying BRL500 million per year should remain in
place.

Fitch views the enlarged group will benefit from PT's expertise in delivering
effective triple and quad-play services; with Fitch considering that PT has
delivered good operational performance domestically despite a particularly
difficult economy. With leverage at both companies under pressure, management
has stated a desire and rationale for the merger, to improve the cash flow and
leverage profile of the combined group.

Oi's ratings reflect solid market positions, business scale, diverse service
platforms and moderate regulatory risk. High leverage, recent negative free
cash flow and intense competition temper credit quality. The ratings of PT
incorporate domestic business pressures in part related to sovereign
pressures, strong fixed line business position becoming the largest
triple-play provider in Portugal, healthy liquidity and associate dividend
underperformance.

RATING SENSITIVITY

Completion of the merger is subject to a number of conditions, including
shareholder and regulatory approvals, [and a successful liabilities management
exercise]. Fitch's existing guidelines will apply until such time as the
merger as proposed is effective. Guidelines for the combined group will be
developed as the prospect of the transaction closing nears.

The current guidelines for Oi are as follows:

--Consistently having a net leverage close to 3.5x or perception by Fitch that
the company is not making progress toward reducing the net leverage due to
weak operating results, higher investments/distributions to shareholders or
weak economic conditions are likely to pressure the ratings.

--Making firm progress towards reducing net leverage to or below 3x in
conjunction with stable operating performance and cash flow generation or
improved operating performance and profitability can support a positive rating
action.

Fitch affirmed the following rating of Oi:

--Local currency Issuer Default Rating (IDR) at 'BBB-';

--Foreign currency IDR at 'BBB-';

--National scale rating at 'AA+(bra)';

--BRL1 billion senior notes due 2022 at 'BBB-';

--US$1.75 billion senior notes due 2020 at 'BBB-';

--US$750 million senior notes due 2019 at 'BBB-';

--EUR750 million senior notes due 2017 at 'BBB-';

--BRL2.25 billion fifth debenture issuance maturing 2014 & 2020 at 'AA+(bra)';

--BRL1.5 billion tenth debenture issuance due 2019 at 'AA+(bra)';

--BRL800 million eleventh debenture issuance due 2020 and 2023 'AA+(bra)' from
'AAA(bra)';

--BRL1.1 billion senior notes due 2016 at 'BBB-'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 5, 2013);

--'Parent and Subsidiary Rating Linkage (Fitch's Approach to Rating Entities
Within a Corporate Group Structure)' (Aug. 5, 2013);

--'Rating Telecom Companies-Sector Credit Factors' (Aug. 9, 2012);

--'National Ratings Criteria' (Jan. 19, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Parent and Subsidiary Rating Linkage Fitch's Approach to Rating Entities
within a Corporate Group Structure

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714476

Rating Telecom Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682323

National Ratings Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=804052

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL,
COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM
THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER
PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS
OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN
EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER
ON THE FITCH WEBSITE.

Contact:

Fitch Ratings
Primary Analyst
Sergio Rodriguez, CFA
Senior Director
+52-81-8399-9100,
Fitch Mexico S.A. de C.V.
Prol. Alfonso Reyes 2612
Monterrey, Mexico
or
Secondary Analyst
Mauro Storino
Senior Director
+55-21-4503-2600
or
Committee Chairperson
Ricardo Carvalho
Senior Director
+55-21-4503-2600
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com
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