Aurelius Tries to Block Oi's Borrowing From Dutch Unit

An Aurelius Capital Management LP fund is asking a judge to prevent struggling Brazilian telephone company Oi SA from borrowing any more money from its Dutch subsidiary, according to a person with knowledge of the matter.

The fund, Capricorn Capital Ltd., filed a lawsuit in Amsterdam arguing that Oi is unable to pay 2.8 billion euros ($3.2 billion) it borrowed from the unit, Oi Brasil Holdings Cooperatief UA, because of its worsening financial situation, said the person.

In the lawsuit, a translation of which was obtained by Bloomberg News, Capricorn says the money mostly came from a loan the Dutch unit took out in June 2015 from another Oi subsidiary, Portugal Telecom International Finance, or PTIF.

Brian Schaffer, a spokesman for Aurelius at Prosek Partners, confirmed the contents of the document and said it was filed on March 30. He declined to comment further. Flavio Nicolay Guimaraes at Oi SA declined to comment for Oi and its subsidiaries.

Stop Loans

Capricorn owns PTIF bonds with a face value of more than 100 million euros, according to the document. The fund is arguing that the Dutch unit should stop making additional loans to its debt-stricken parent company or other affiliates until it repays PTIF for loans maturing in June.

The fund is concerned the money going to Oi SA would make it difficult for the Dutch unit to pay back PTIF when the debt comes due, said the person. Capricorn is arguing the Dutch unit was insolvent at the end of 2015 because the value of its debt exceeded the value of its assets, according to the document. The unit reported 5.86 billion euros in total assets and 5.87 billion euros in debt. 

Oi Brasil Holdings Cooperatief UA’s 5.75 percent senior unsecured notes maturing February 2022 last traded at 25.75 cents on the dollar at 1:36 p.m. in New York. They have fallen by about 1 cent since Thursday and 55 cents over the last 12 months, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Aurelius has previously been involved in litigation against borrowers including the government of Argentina and Energy Future Holdings Corp., formerly TXU Corp.

Heavy Debt Load

Oi, the fourth biggest mobile phone operator in Brazil, is suffering from a heavy debt load and its legal commitments to the nation’s government to expand and maintain an obsolete landline phone network.

In October, Russian billionaire Mikhail Fridman proposed merging Oi with Telecom Italia SpA’s Brazilian unit, a deal that would have pumped $4 billion into Oi. The transaction fell through in February.

This month, Oi said it hired PJT Partners to advise it on how to manage its debt, which totaled more than 55 billion reais ($15.4 billion) at the end of the fourth quarter. The company had 16.8 billion reais in cash and short-term investments.

Analysts say any debt restructuring would also have to include an overhaul of Oi’s business, which would in turn require changes in Brazil telecommunications law. The company’s shares have 7 hold recommendations, 3 sells and no buy, according to data compiled by Bloomberg.

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