- Current shareholders said to be seen as the main beneficiaries
- Banks and bondholders said willing to negotiate new terms
Creditors of Oi SA, the Brazilian phone company that filed for bankruptcy with $20 billion of debt, view the restructuring plan the company presented late Monday as unfairly benefiting shareholders, said two people with direct knowledge of the matter.
The main issue is the right Oi has to redeem bondholders’ convertibles anytime it wants, the people said, asking not to be named because the position isn’t public yet. Creditors argue that the option for early redemption gives current shareholders power to avoid dilution if the company manages to stage a turnaround, but leaves bondholders with a large stake if things go badly, the people said.
The Rio de Janeiro-based operator proposed converting up to 32.3 billion reais ($10.1 billion) of bondholders’ 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 -- leaving current shareholders in control of the company for that time span, and potentially benefiting from any recovery, the people said.
The creditors also oppose the 10-year grace period suggested for bank debt, considered too long, and the option shareholders have of using proceeds from asset sales to pay bondholders’ convertibles, which could avoid dilution, the people said. The plan will need to change to be approved by creditors, according to the people.
“The proposal is unattractive to creditors and should be viewed, we think, as an indication of the company’s intention to present a tough stance in upcoming negotiations with creditors,” Francisco Velasco, an analyst at Exotix Partners, said in a research note dated Wednesday. He recommended selling Oi bonds.
A press official for Oi declined to comment on creditors’ concerns about the restructuring plan.
The plan, which also includes new resources and the possibility of a merger or breakup, was approved by the company’s board and filed with a court in Rio late Monday, 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 shareholders, Pharol SGPS SA and Nelson Tanure, are already in talks, people familiar with the matter said last week.
“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.
Oi has listed almost 67,000 creditors between bondholders, banks and small companies, as well as Anatel, the nation’s telecommunications regulator. According to Brazilian law, creditors have 30 days to object to the plan before a general assembly takes place led by the judicial administrator PricewaterhouseCoopers and law firm Wald.
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.
Oi bonds due 2020 rose 21 cents to 26.38 cents, recovering some losses Wednesday after plummeting the day before. Brazil’s stock market was closed Wednesday for a holiday. The company’s shares tumbled 17 percent in Sao Paulo on Tuesday.