Fitch Places Oi on Rating Watch Negative

  Fitch Places Oi on Rating Watch Negative

Business Wire

CHICAGO -- February 26, 2014

Fitch Ratings has placed Oi S.A.'s (Oi) 'BBB-' foreign and local currency
Long-term Issuer Default Rating (IDR) and senior unsecured bonds on Rating
Watch Negative (RWN). Fitch has also placed Oi's 'AA+(bra)' National Long-term
Rating and local debentures on Negative Watch.

The Negative Watch reflects Fitch's view that following the proposed merger
between Oi and Portugal Telecom (BBB-/RWN) the financial profile of the
post-merger entity is less likely to support a 'BBB-' rating. The Negative
Watch will be resolved following the closing of the transaction.

Oi continues to be rated on a standalone basis. Fitch expects the proposed
merger between Oi and Portugal Telecom (PT) will proceed, with the enlarged
group benefiting from increased scale and geographic diversification, merger
synergies, and a simpler group structure.

PT will have to recapitalise the intermediate holdings prior to the
transaction and therefore increase its leverage. As such the deleveraging
benefits from the BRL8 billion capital increase are likely to be modest, with
pro-forma opening leverage of the merged group likely to be inconsistent with
current ratings.

Financial pressures were evident in 2013 results from both companies, while
Oi's Brazilian operations are in the midst of a turn-around, which is taking
longer to deliver and requiring heightened levels of investment. PT's domestic
EBITDA declined by 9.1% in 2013, while Oi's underlying EBITDA was down 7.6%
and leverage (net debt to EBITDA) was 4.0x at year end. Pro-forma leverage of
the post- merger group, estimated by Fitch at around 3.8x, with the absence of
any material free cash flow, in Fitch's view, is unlikely to allow the company
to deleverage for some time.

Assuming outstanding regulatory approvals and other conditions to the merger
are met, significant pressure is likely to remain on the merged entity's
financial performance over the medium term, increasing the likelihood that
ratings for the combined entity may be lower than the current 'BBB-' rating.

Pro-forma 2013 revenues and EBITDA of the combined entity were BRL37.8 billion
and BRL11.3 billion, of which approximately 67% of EBITDA originates from
Brazil.

KEY RATING DRIVERS (for Oi on a standalone basis)

Continued Margin Suppression: Fitch does not expect Oi's operating margin to
show material improvement in the short term due to operational challenges.
Although the recurring EBITDA margin has somewhat recovered to 30.1% and 27.7%
in 3Q'13 and 4Q'13, respectively, from 25.4% in 2Q'13, any further recovery
will be difficult given the competitive pressure in the Brazil telecom market,
increasing employee-related expenses, as well as high rental expenses, partly
due to on-going network asset sales. Fitch forecasts that its EBITDA margin
will remain below 30% in 2014 and 2015.

Deleveraging Unlikely in the Short-term: Oi is expected to continue its
negative free cash flow (FCF) generation in 2014 and 2015 due to on-going
margin erosion and high capex. It is the agency's view that its capex
requirement of about BRL5 billion and dividend payment of about BRL500
million, from 2015, will not be fully covered by its cash flow from operations
(CFO). The company also has been disposing its non-core assets to raise cash
but its impact on net debt has been and will remain limited as non-operating
cash outflows, such as licenses, concessions, and judicial deposits, will
mostly offset the sales proceeds. Therefore, its net financial leverage is
highly likely to be sustained over 3.5x - negative rating action guideline for
Oi's standalone ratings - over the medium term.

RATING SENSITIVITIES

Fitch's existing guidelines will apply until the merger as proposed is
effective. Guidelines for the combined group will be developed once the
transaction closes.

The current guidelines are as follows:

Negative: 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.

Positive: 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.

Additional information is available on www.fitchratings.com.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 05, 2013);

--'Rating Telecom Companies' (Aug. 09, 2012).

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

Rating Telecom Companies

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=821754

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Contact:

Fitch Ratings, Inc.
Primary Analyst
Alvin Lim, CFA, +1-312-368-3114
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
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Senior Director
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