Fitch Cuts Oi, Portugal Telecom to Junk After Rioforte’s Default

Fitch Ratings downgraded Brazil’s Oi SA and Portugal Telecom SPGS SA to junk after a unit of Espirito Santo International defaulted on debt payments to the European carrier, which plans to merge with the South American company.

Long-term debt ratings for Oi, the biggest Brazilian phone company, and Portugal Telecom were cut to BB+ from BBB-, Fitch said in a statement yesterday. Rioforte Investments, a subsidiary of Espirito Santo, failed to repay 847 million euros ($1.1 billion) of short-term debt this week. Rioforte owes Portugal Telecom an additional 50 million euros due today. The Espirito Santo group owns 10 percent of Portugal Telecom.

“The downgrade primarily reflects the financial profile of the post-merger entity between Oi and PT that is not able to initially support an investment-grade rating,” Fitch said in the statement. “Further, any material or immediate improvement in the financial profiles of the pro forma merged entity may prove challenging despite the management’s intention to delever.”

The proposed merger is expected to proceed after the companies’ revised some of the financial terms of the transaction, according to Fitch. In exchange for unpaid debt owed to Portugal Telecom by Rioforte, the Portuguese carrier will transfer voting and non-voting shares to its Brazilian partner, the companies said in statements. That would leave Portugal Telecom with a 25.6 percent stake in the combined entity, down from an earlier plan for a holding of as much as 39.6 percent.

Local Ratings

The ratings company also downgraded Oi’s domestic credit rating to AA(bra) from AA+(bra), according to the statement. The credit outlooks for the Brazilian and the Portuguese companies are now stable, Fitch said.

Oi has said it wasn’t aware that Portugal Telecom had purchased the Rioforte paper in April. Portugal Telecom hasn’t said why Oi wouldn’t have been informed despite the impact it would have on debt ratios after a merger. Portugal Telecom on June 30 called the debt a treasury operation.

The carriers “remain committed to the full completion of their business combination,” Portugal Telecom said in its statement yesterday, adding that it plans to work with Oi to “pursue its legal and procedural options against Rioforte and relevant related parties.”

Before it's here, it's on the Bloomberg Terminal.