Oi Cut to Junk by S&P as Rioforte Default Hits Portugal Telecom

Oi SA (OIBR4)’s credit rating was cut to junk by Standard & Poor’s, which cited merger partner Portugal Telecom SGPS SA’s potential losses from defaulted debt.

The Brazilian phone company’s rating was reduced to BB+, one step below investment grade, S&P said in a statement today. Oi will have a worse-than-expected cash position after a unit of Espirito Santo International missed debt payments to Portugal Telecom this week, which will weaken its credit metrics when the companies combine, S&P said.

Oi’s $1.5 billion of notes due in 2022 lost 0.33 cent to 96.04 cents on the dollar at 4:06 p.m. in New York, after losing 1.77 cent yesterday following a similar cut by Fitch Ratings. The notes are the worst performers among 22 telecommunication services bonds from emerging markets this month, according to data compiled by Bloomberg.

Portugal Telecom faces a loss of 897 million euros ($1.22 billion) from short-term debt it bought from Rioforte Investments SA after this week’s default. Because of the default, merger terms were changed this week so that the Portuguese carrier will reduce its stake in the combined entity, the companies said in statements released July 16.

“The downgrade reflects the somewhat weaker credit metrics than we previously expected in our base-case scenario, following the nonpayment” of the Rioforte debt, S&P analysts Luisa Vilhena and Marcela Duenas wrote in a report.

To contact the reporter on this story: Filipe Pacheco in Sao Paulo at fpacheco4@bloomberg.net

To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net Rita Nazareth

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