Oi Offers 70% Haircut for Bonds in Bankruptcy Recovery Plan

  • Phone company filed for bankruptcy protection in June
  • Telecommunications operator has almost 67,000 creditors

Oi SA, the Brazilian phone company struggling under $20 billion in debt, proposed a bankruptcy recovery plan that includes a reduction of as much as 70 percent in the value of its bonds.

The judicial recovery plan, which also includes asset sales, new resources and the possibility of a merger or breakup, was approved by the company’s board and filed with a court in Rio de Janeiro, according to a filing. Now that the document has been presented, Oi’s debtholders and shareholders have 30 days to negotiate before presenting a revised plan. Two top investors, Pharol SGPS SA and Nelson Tanure, are already in talks, people familiar with the matter said last week.

The company’s dollar-denominated bonds due in 2020 fell 9 percent to 26.1 cents, compared with 67 cents a year ago. Oi’s shares dropped 6 percent to 3.25 reais, after rising
23 percent on Monday.

The Rio de Janeiro-based operator proposed converting up to 32.3 billion reais ($8.74 billion) of debt into convertible bonds with a face value of 10 billion reais. Lenders would get 85 percent of the company if Oi doesn’t pay off the debt in three years. Creditors who opt against the convertible debt may choose between granting Oi a 10-year grace period with interest of 8 percent or the TR reference rate plus 1 percent for loans denominated in reais, whichever is higher, or interest of 1.25 percent for debt in dollars.

“It’s difficult to come to terms with shareholders walking away with substantial value while bondholders are taking massive haircuts,” said David Tawil, co-founder of New York-based hedge fund Maglan Capital.

Creditors who agree to lend new money to Oi can begin to recover capital after five years, with interest of Libor plus 1.5 percent for new contracts in dollars or the CDI interbank deposit rate plus 0.25 percent for new contracts in reais. The company also proposed the sale of some assets, including stakes in telecom companies in Asia and Africa, its fiber optic network in Sao Paulo, real estate units, towers and data centers.

Oi is also proposing to pay for more than 13 billion reais in fines it owes to Brazil’s telecommunications regulatory agency Anatel through investments. If common ground is not reached, the fines would be subject to the same terms proposed to debt holders.

Oi has listed almost 67,000 creditors between bondholders, banks and small companies, as well as Anatel. According to Brazilian law, creditors have 30 days to object to the plan before a general assembly takes place presided by the judicial administrator PricewaterhouseCoopers and law firm Wald.

Brazilian law divides creditors into four classes: labor-related creditors, creditors with and without guarantee and micro and small companies. In the assembly, the plan needs to be approved by single majority of each of the four classes of creditors, both by number of creditors present in the meetings and by value of credit.

Oi, which finished the second quarter with total debt of 48.4 billion reais, filed for protection from creditors in June amid a looming bond payment and after some board members disagreed with a debt swap plan proposed by a Moelis & Co.-led group that would have given bondholders 95 percent of the company.

Brazil’s fourth-biggest wireless company was built through a series of mergers and went through a number of leadership changes -- the company has had six chief executive officers in the past five years. It operates part of the country’s landline phone system, which has proven onerous -- Oi has a legal commitment to expand and maintain the obsolete network.

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