After CEO Splits, Bond Traders Brace for a Big Default in Brazil

  • Company has 231 million euros of bonds due next month
  • Gontijo is the second Oi CEO to resign in less than two years

Bond investors in Oi SA are preparing for the worst after Chief Executive Officer Bayard Gontijo unexpectedly quit in the middle of talks to restructure some of the phone operator’s more than $14 billion of debt.

Oi’s $1.8 billion in notes due in 2020 have plunged to a record low of 21.8 cents on the dollar in the wake of the resignation. The level signals bondholders have little confidence the company will be able to honor its debt, including 231 million euros ($261 million) of notes due next month.

Gontijo’s departure is the latest blow to the debt-laden company in recent years. In October, Oi cut a deal with Russian billionaire Mikhail Fridman to help it finance a merger with Telecom Italia SpA’s Brazilian unit only to see the agreement fall through in February. The phone company, which has struggled since taking on debt as part of its troubled merger with Portugal Telecom in 2013, operates part of Brazil’s landline phone system, which has proven onerous as the company has a legal commitment to expand and maintain the obsolete network.

“The situation is bad for Oi, and it gets worse every day,” said Adeodato Volpi Netto, the head of capital markets at Eleven Financial Research. “Gontijo was interested in turning the company around. The feeling now is that there may be several undisclosed things that will only come up when the whole thing explodes.”

The 44-year-old Gontijo -- the second Oi CEO to resign in less than two years -- disagreed with some board members on how to move forward on negotiations with debt holders, and he opted to resign to allow the talks to proceed quickly, said a person familiar with the matter who asked noted to be identified because he isn’t authorized to speak publicly. Debt holders involved in the talks were surprised by the resignation of Gontijo, who had met with them in recent days, said another person, who also asked not to be identified because the discussions are private.

As recently as two weeks ago, Oi’s restructuring talks had been advancing, with six investors signing a confidentiality agreement to access company information, the people said.

Oi declined to comment on restructuring plans or bond payments.

The Rio de Janeiro-based company also has 1.1 billion reais ($316 million) of local bonds coming due in September. Brazil’s currency was down 0.4 percent to 3.4955 per U.S. dollar on Tuesday.

Trading with credit default swaps linked to Oi traded at a level that indicates investors have priced in almost-certain odds of a default within the next five years.

Gontijo “was deeply involved in the whole negotiation with creditors,” said Marcelo Lima, a fixed-income trading manager at INTL FCStone Securities Inc. in Miami. “Watching him leave all of a sudden like this raises concerns that there are problems within the company that are not even known yet. Oi lost credibility as a whole and if they don’t renegotiate the debt, there is no chance they can survive.”

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