- Carrier said to start formal talks with creditors Wednesday
- Final proposal including haircut seen completed this month
Oi SA, the most indebted phone operator in Brazil, may receive a proposal from bondholders to convert as much as 10 billion reais ($2.9 billion) in debt into equity, said a person with knowledge of the matter.
The idea is likely to be discussed Wednesday, when the Rio de Janeiro-based carrier will start negotiations with bondholders represented by Moelis & Co., the person said, asking not to be named because the discussions are private.
The group’s view is that the only way to avoid a default is to reduce the firm’s leverage to about 3.5 times earnings before interests, taxes, depreciation and amortization, or about 25 billion reais, the person said. The company had 49.4 billion reais in debt at the end of March, with almost half of it scheduled to mature by 2018.
With the swap, bondholders could have gains in the future if Oi succeeds in selling its assets to competitors, the person said.
Oi and Moelis declined to comment.
Oi said Monday it plans to meet with advisers and bondholders represented by Moelis this week in New York to start formal talks. The company asked bondholders who haven’t yet joined the Moelis group to do so.
Moelis’s committee has expanded to about 40 different investors, representing holders of 25 percent of the company’s international bonds, the person said.
A final proposal, including the terms of the transaction, will be hammered out this month, the person said. The deal is also likely to include a haircut, or reduction of the amount to be repaid to creditors, and an extension of debt maturities, the person said.
One Oi investor, Aurelius Capital Management, is claiming one of the phone company’s units will potentially be in default if it doesn’t fix breaches of its debt covenants by May 29.
Capricorn Capital, a fund affiliated with Aurelius, said in a letter to Oi’s Portugal Telecom International Finance unit, or PTIF, on May 10 that the borrower “has failed to comply with” a number of clauses in the bond indenture, thus “resulting in a potential event of default.” In the same letter, a copy of which was obtained by Bloomberg News, Aurelius said the issuer has until May 29 before the default will be triggered and the bonds must be paid immediately.
Oi, whose name means “hi” in Portuguese, is the fourth-biggest mobile-phone operator in Brazil. It also operates part of the country’s landline phone system, which has proven onerous -- the company has a legal commitment to expand and maintain the obsolete network. It had about 5 billion reais of interest expenses in 2015, far more than the roughly 2.7 billion reais of operating income it had available to pay those costs, according to data compiled by Bloomberg.
The telecommunications carrier said in March it hired PJT Partners Inc. for advice on how to manage its debt, and the company announced an agreement April 25 to begin talks with the group represented by Moelis, aiming to quickly complete a restructuring process. Customers won’t be affected by the reorganization, the phone carrier has said.
Oi’s total debt represented more than four times its equity as of the end of last year, compared with 47 percent for rival Tim Participacoes SA and 15 percent at Telefonica Brasil SA, according to data compiled by Bloomberg.