Espirito Santo Stigma Fades for Oi Bonds Branded as Junk

Oi SA, Brazil’s most-indebted phone company, is getting a vote of confidence in the bond market one month after credit-ratings companies consigned it to junk.

The issuer’s $1.5 billion of notes due in 2022 have risen 4.5 percent from a six-month low on Aug. 6 as Oi pledged more asset sales and the chief executive officer of merger partner Portugal Telecom SGPS SA resigned in the wake of an undisclosed investment in a unit of Espirito Santo International. That’s three times the average gain in emerging markets.

Oi is winning back investors after losing its investment grades from both Fitch Ratings and Standard & Poor’s in July as Portugal Telecom faced losses on 897 million euros ($1.22 billion) of commercial paper it bought from a firm that reneged on the debt. Oi Chief Executive Officer Zeinal Bava said on Aug. 6 it’s considering “more asset disposals” after raising almost $3 billion through sales since April 2013 to reduce debt.

“It seems like the worst in terms of bad news is left behind,” Klaus Spielkamp, the head of fixed income at Bulltick LLC in Miami, said in an e-mail. “Regarding more assets sales, from the bondholders perspective, anything that signals a sale and decrease in leverage ratio is positive.”

‘Strategic Options’

An Oi spokeswoman, who asked not to be identified in accordance with company policy, declined to comment on the bonds’ performance.

Oi, which has negotiated six different deals to unload assets from submarine cables to fixed-line towers in the past 16 months, is considering “various options” for further disposals, Bava said.

“We are focusing on ensuring that we can look at all the strategic options available so that we can continue to dispose of assets,” he said on an Aug. 6 conference call with analysts.

A day later, Portugal Telecom said Chairman and CEO Henrique Granadeiro had resigned.

Rioforte Investments SA, a subsidiary of Espirito Santo International, failed to repay 897 million euros in commercial notes acquired by Portugal Telecom last month. Espirito Santo International and Rioforte asked for protection from creditors under Luxembourg law in July. The Espirito Santo group owns 10 percent of Portugal Telecom.

Fitch and S&P cut Oi’s rating to BB+, one level below investment grade, from BBB-. Moody’s Investors Service put Oi’s Baa3 rating on review for a downgrade July 17.

The real advanced less than 0.1 percent to 2.2607 per dollar today as of 3:04 p.m. in New York.

Oi Bonds

Mark Stodden, an analyst at Moody’s, said that even with more asset sales Oi will still struggle to reduce its net debt to earnings before interest, taxes, depreciation and amortization from 4.4 times expected for the end of this year.

“Most of their leverage reduction will have to be organic and is going to take a long time,” he said by telephone from New York.

The fallout from Portugal Telecom’s botched investment caused Oi’s bonds to fall 4.8 percent in July and to touch 92.75 cents on the dollar on Aug. 6, data compiled by Bloomberg show. The securities traded at 96.88 cents yesterday.

Oi announced yesterday it has asked Banco BTG Pactual SA to review options “with the purpose of enabling a viable proposal for the acquisition of the shares” of competitor Tim Participacoes SA, indirectly held by Telecom Italia SpA.

“There was an overreaction from investors after the Espirito Santo case,” Diego Torres, the head of emerging-market corporate debt research at MCC Securities, said in an e-mailed response to questions. “Bonds were trading cheap versus comparables if adjusted to the new rating and assuming the relevance of the company in the telecom sector.”

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