Oi Bondholders Propose $12 Billion Investment Plan

  • Export credit agencies, Sawiris said to contribute to proposal
  • Plan said to include 25 billion-real debt-to-equity swap

Oi SA, the Brazilian phone carrier under bankruptcy protection, will receive a proposal this week from bondholders, the Egyptian billionaire Naguib Sawiris and export credit agencies that includes a plan to invest about 40 billion reais ($12 billion) over six years, said a person with direct knowledge of the matter.

The bondholders, represented by Moelis & Co., and Sawiris would inject $1.2 billion in new money, and the export credit agencies would also be willing to help finance investments, the person said, asking not to be identified because the plan isn’t public yet. Part of the 40 billion reais would also come from operating cash flow generated by Oi -- around 6.5 billion reais a year, the person said. The idea is to invest in technology and infrastructure for data, focusing on mobile, pay TV, broadband and better customer service.

To revive Oi, which has total debt of about $19 billion, the plan would convert about 25 billion reais in foreign-currency bonds into equity, with the bondholders ending up with 95 percent of the company, the person said. That would represent a reduction of about 80 percent in the bonds’ total amount, if the value of the equity is considered equivalent to zero. The remaining notes would be covered by a newly issued bond, the person said.

Banks, which hold about 10 billion reais in Oi debt, wouldn’t have to accept a reduction in the amount of their debt, but would have to agree to lower interest payments and longer maturities. Similar conditions are being proposed for the $1.6 billion in claims from the export credit agencies, including China Development Bank Corp., the person said.

For the 20 billion reais in obligations claimed by telecommunications regulator Anatel in fines and taxes, about 5 billion reais would be paid and the rest converted into investments in Oi’s infrastructure, the person said.

Oi shares rose as much as 7.4 percent to 2.62 reais in Sao Paulo Thursday, and were trading at 2.51 reais as of 12:51 p.m. The stock has more than doubled since the company’s filing for bankruptcy protection on June 20.

“Oi needs a clear way out of judicial recovery that involves getting cash, and having some concrete offer is always positive news, despite diluting shareholders,” said Rafael Ohmachi, an analyst at brokerage Guide Investimentos. “The dilution is partly priced in already and news that signals Oi might receive a strong capital injection always seems like good news.”

Competing Groups

The group of export credit agencies and insurers, represented by FTI Consulting, and the Moelis-represented group of bondholders are working together in one of a few competing alliances trying to steer Oi’s fortunes. Rio de Janeiro-based Oi said last week it’s in talks with Cerberus Capital Management, the U.S. private equity firm that specializes in distressed investing. Oi signed a confidentiality agreement with Cerberus and hasn’t received a proposal for any transaction, the Brazilian company said in a filing.

Another group, advised by G5 Evercore, includes funds such Attestor Capital LLP, York Capital Management and Aurelius Capital Management among its members, people familiar with the matter said last month.

The phone operator has also held talks with Elliott Management Corp., the hedge fund company led by billionaire Paul Singer. Elliott has conducted due diligence on the company, Oi Chief Executive Officer Marco Schroeder said in November.

In its judicial recovery plan, unveiled in September, Oi proposed converting as much as 32.3 billion reais of debt into convertible bonds with a face value of 10 billion reais. Bondholders balked at Oi’s restructuring offer, saying the convertible debt would expose them to even more losses if the carrier fails to rebound, while current shareholders would benefit from the gains if the company recovers.

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