- Analysts see growing probability of restructuring within year
- Bonds tumble after Telecom Italia Brazil unit scrapped merger
Brazil’s most indebted phone company just cost its bondholders a lot of money.
Oi SA’s foreign-currency debt lost almost $2 billion of market value Thursday after Russian billionaire Mikhail Fridman withdrew his proposal to help finance a merger between Oi and Telecom Italia SpA’s Brazilian unit. Telecom Italia’s Tim Participacoes SA doesn’t want to continue with discussions, Fridman’s investment vehicle LetterOne Technology said, adding that it is still interested in investing in Brazil.
Fridman’s withdrawal ends four months of efforts to structure a deal and will leave Rio de Janeiro-based Oi struggling to avoid default, according to analysts at Societe Generale SA and Barclays Plc. The company has $4.5 billion of debt payments due by the end of next year and its high rate of cash burn will make it hard for Oi to borrow to pay that back, according to Robert Jaeger, an analyst at Societe Generale in London.
“Price action is rightly pricing in a high level of a near-term restructuring event in the next 12 months,” Jaeger said.
The market value of Oi’s bonds in dollars and euros fell to $6.4 billion on Thursday from $8.4 billion on Wednesday, according to data compiled by Bloomberg. Notes due in 2022 fell eight cents to 25 cents per dollar Friday as of 1:55 p.m. in New York.
Oi declined to comment on its bond performance and the possibility of restructuring. It said in a regulatory filing Thursday that it will assess consolidation in the Brazilian telecommunications market. The company had $2.2 billion of short-term debt and $3.3 billion of cash at the end of the third quarter, according to data compiled by Bloomberg.
Earlier this week, Folha de S. Paulo newspaper reported the government is working on revisions to the framework for fixed-line telephone concessions in Brazil, which clouds the outlook for the competitive landscape going forward, according to Eriko Miyazaki-Ross, a credit analyst at Barclays Plc in New York.
“Oi’s balance sheet is unsustainable in its current form,” Miyazaki-Ross said. “The only real avenue open to them to address this was consolidation.”
The company has already sold most of its non-core assets, and without the possibility of a business combination with Tim, a restructuring is increasingly likely in the next six months, Miyazaki-Ross said. That would probably involve a steep discount.
“Bondholders might not have a lot of bargaining power at this point,” she said.