Portugal Telecom, Oi Fall as Espirito Santo Debt Trips Alarm

Portugal Telecom SGPS SA and Brazil’s Oi SA tumbled in trading today on concern that their merger will be undermined by its purchase of short-term debt from the troubled Espirito Santo group.

The Portuguese carrier’s stock dropped 6.8 percent to a record low of 1.86 euros. Oi, based in Rio de Janeiro, plummeted 14 percent to 1.42 reais, an all-time low, in Sao Paulo trading.

Portugal Telecom said it holds 897 million euros of commercial paper from Rioforte Investments, a fully owned subsidiary of Espirito Santo International, which failed to make payments on some of its short-dated debt. Brazil’s state development bank, known as BNDES, on July 8 said that the debt purchase by Portugal Telecom lacked good corporate governance.

“The merger is the biggest worry,” said Mark Chapman, an analyst at CreditSights Inc. in London, who recommends reducing holdings of Portugal Telecom debt. “The broader issue is that existing differences of opinion about whether the merger was the right thing to do at the right price come to the fore when events create this sort of uncertainty.”

Espirito Santo International missed payments on some of its short-term securities, according to a July 8 statement. Portuguese government debt led declines among securities from Europe’s most indebted nations this week, while banks dragged stocks in the region down more than 1 percent.

Bonds Recover

The Espirito Santo group of companies owns about 10 percent of Portugal Telecom, which in turn holds 2.1 percent of Banco Espirito Santo SA, the nation’s second-largest bank by market value.

The merger partners’ bonds recovered from earlier losses. Portugal Telecom’s 750 million euros ($1 billion) of 5 percent notes fell 1.2 cents on the euro to 106.2, the lowest since February, to yield 3.7 percent. They had dipped as low as 103.7 earlier today. Oi’s $1.5 billion of 2022 bonds climbed 0.45 cents to 96.29 cents on the dollar, snapping three days of losses.

“Despite these troubles, given the advanced state of the merger between PT and Oi, scheduled for the third quarter of this year, we expect it to still go through,” said Antonio Roldan, an analyst at Eurasia Group, in an e-mailed note.

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