Aurelius Draws Traders’ Support in NII Battle: Corporate Finance

Aurelius Capital Management LP, the distressed-debt investor that has battled the government of Argentina and some of Wall Street’s biggest buyout firms, is drawing support for its claims that a mobile-phone carrier in Latin America effectively subordinated some of its obligations.

Bonds of NII Holdings Inc. that are owned by the hedge fund have jumped 38 percent since March 3, the day before Aurelius sent the company a letter with the contention that the securities it holds were improperly pushed down in the capital structure. Notes from the same unit that aren’t covered under that argument are little changed.

The bond rally indicates investors think Aurelius may be successful in its attempt to quash NII’s 2009 transfer of equity interests among its units that had the effect of removing guarantees on the notes in question and eroding their seniority to claims on assets. The higher the ranking, the more potential return for creditors in a bankruptcy of the unprofitable Reston, Virginia-based company and the stronger their bargaining position in a potential debt restructuring.

“Aurelius has been involved in a lot of litigation in the past few years,” including Argentina, General Motors Co., bond insurer MBIA Inc., and Energy Future Holdings Corp., the former TXU Corp., Adam Cohen, founder of independent credit research firm Covenant Review, said in a telephone interview. “Sometimes they prevail, and sometimes they don’t. Part of the price action is the market handicapping whether they’re right or not.”

Strategic Opportunities

Brian Schaffer, a spokesman for Aurelius at Prosek Partners in New York, declined to comment. Claudia Restrepo, an NII spokeswoman, didn’t respond to telephone and e-mailed requests seeking comment.

The provider of Nextel services that does business in Argentina, Brazil, Chile, and Mexico, has $4.4 billion of bonds due from 2016 to 2021 and $2.3 billion of cash and short-term investments, according to data compiled by Bloomberg. It said in a statement March 10 that it retained UBS AG and Rothschild Inc. to advise on strategic opportunities because it may not be able to fulfill its financial obligations starting next year.

Buffeted by customer defections amid delayed rollouts of its third-generation cellular networks in Brazil and Mexico, NII posted its seventh straight quarterly loss in February, triggering rating cuts by Moody’s Investors Service and Standard & Poor’s.

Subscriber Flight

Moody’s reduced NII’s corporate family rating to Caa1 on March 3. S&P cut the company to CCC, one level below Moody’s, and gave lesser rankings to bonds issued by two units. The company will need to raise capital in the near term, S&P said in a note announcing the ratings cut. The triple-C grades indicate high-risk bonds that are susceptible to default under current economic conditions.

After a net loss of 247,000 subscribers in the fourth quarter, about 2 percent of the total, NII will have to “significantly” improve its operating performance and consider additional options to increase liquidity to fund its business in 2015 and thereafter, the company said a Feb. 28 statement.

Job Cuts

NII, which said in December that it would cut 1,400 jobs, lost $745.8 million in the fourth quarter, a wider shortfall than the $592.9 million deficit in the corresponding period of 2012, Bloomberg data show.

“At a minimum they need to improve their capital structure, and it seems they’re recognizing they’ll need a partnership,” Jim Harper, head of research at BCP Securities LLC, said in a telephone interview from Greenwich, Connecticut. “By hiring UBS and Rothschild, it sends a message there’s going to be a restructuring as part of it.”

Aurelius, based in New York, asked NII to affirm its obligations under debt guarantees, saying inter-company transfers of equity interests to Nextel International Holdings SarL from NII Global Holdings Inc. violated bond terms. That rendered the release of the notes’ guarantee ineffective, according to the letter.

Aurelius funds hold more than 25 percent of NII’s $500 million of 8.875 percent senior unsecured notes maturing in December 2019 and a “significant percentage” of the $800 million of 10 percent bonds due in August 2016, according to the March 4 letter to NII signed by Chairman Mark Brodsky and obtained by Bloomberg News.

NII’s 8.875 percent bonds jumped to 57.1 cents on the dollar as of 11:11 a.m. in New York to yield 22.6 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That’s up 15.6 cents since before Aurelius’s letter. The 2016 notes climbed 7.4 cents to 50.9 cents on the dollar.

‘Value Chain’

The telecommunications company’s $1.45 billion of 7.625 percent notes due in April 2021 issued after the transfer and therefore without the contractual issues Aurelius is addressing, have fallen 0.9 cent to 34.2 cents on the dollar.

BCP, an investment bank specializing in emerging-markets fixed-income securities, has a “sell” recommendation on the 2021 bonds.

“This whole letter speaks to capital structure arbitrage,” Robert Abad, who helps oversee about $53 billion of emerging-market debt at Western Asset Management Co., said in a telephone interview from Pasadena, California. “They’ll argue that if you’re a holder of notes that were deemed to be junior, you should have a higher spot in the capital structure. You should expect other classes of noteholders to respond in kind. Where creditors are on this value chain matters.”

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