‘Everybody Will Complain’: $19 Billion Oi Drama Comes to a HeadBy
Creditors, board still sparring a day ahead of meeting
China Telecom representatives pay a visit to Rio headquarters
Marco Schroeder took pride in the planning involved in Oi SA’s big event to exit bankruptcy proceedings. About 6,000 attendees were expected at the creditor meeting in Rio de Janeiro last month, and Schroeder, the chief executive officer, was eager to demonstrate the professionalism of a company ready to get back on its feet.
He ended up hosting nothing but a dress rehearsal. Days later, Schroeder, 53, scrolled wistfully through mobile-phone pictures of the stage and the lighting in the exhibition center space. After 16 months of struggle to bring his company back from a record $19 billion bankruptcy proceeding, no resolution was in sight.
Now, weeks later, Oi’s long drama continues to escalate. A new creditors meeting scheduled for Friday was postponed by a judge again Thursday, and tensions are rising among the various parties involved in the proceedings.
Creditors are now scheduled to vote Dec. 7 on a restructuring proposal, but no plan has yet been put forth that would be likely to win debt holders’ approval. Schroeder’s attempts to negotiate with creditors have led to a standoff with the board that could threaten his job.
Schroeder, a gregarious native of the southern Brazil state of Rio Grande do Sul, is at the center of the fight for the soul of Oi, a former part of a state monopoly that racked up debt and government fines for poor service over decades of mismanagement.
Brazil has been wracked by scandal and corporate malfeasance, but Oi’s case is more about missed opportunities and bad decisions. It’s Brazil’s only locally owned phone company, competing with international giants Telefonica SA, America Movil SAB and Telecom Italia SpA, and it operates the world’s second-largest fiber-optic network. Oi has 100,000 employees and 62 million customers, and it’s the sole provider of phone service to more than 2,000 cities spread around Brazil, a country bigger than the continental U.S.
Yet local pride has kept it from being swallowed up by an experienced global operator more than once. Its heavy debt load prevented it from investing in its network for years, leaving the company further behind competitors in quality and leading to harsher fines from regulators.
It’s unclear at this point what proposal creditors will vote on at the Dec. 7 meeting. The plan that was approved by the board has little chance of winning the support of bondholders because it doesn’t give them control, and the government’s still reviewing it. The plan pays bondholders an upfront fee in exchange for a cash injection and equity swap totaling about $2.2 billion.
Schroeder and Oi’s management oppose portions of that proposal because they say the fee could drain the company’s cash. The CEO was negotiating a plan with bondholders that might have been more likely to gain favor, but the shareholder-controlled board overruled him by moving ahead with its own proposal. The bondholders want to convert their debt into a bigger stake in Oi than the board’s plan allows.
If creditors don’t approve a plan in December, they have another chance Feb. 1. If no proposal gains favor by then, the court could liquidate the company. Schroeder remained optimistic it wouldn’t come to that, but he said that a plan that gets approval will require each party to sacrifice.
“In the end, everybody will complain,” Schroeder said in his office in October. “Shareholders will be unhappy and creditors will be unhappy. The point is to go through this process in a relatively balanced way.”
Another potential suitor is approaching, one that could help Oi ramp up its investments. On an afternoon in late October, days after Oi’s creditor meeting was postponed by court order, representatives of China Telecom Corp. were visiting the company’s headquarters in Rio’s stately Leblon neighborhood, doing due diligence for a potential offer.
Schroeder was more preoccupied that day with making peace between the several warring factions fighting over Oi. They include shareholder Nelson Tanure, a businessman with a penchant for lawsuits; two groups of international creditors demanding control; government regulators owed billions of dollars in fines; and workers, suppliers and other creditors who depend on the company for their livelihoods.
The case has drawn the attention of President Michel Temer, who assembled a task force to work with all parties to find a solution. Telecommunications regulator Anatel has backed Schroeder, who has increasingly butted heads with Tanure, leading to speculation the CEO will resign. So far, Schroeder is still standing.
Oi’s creditor list is a who’s-who of the distressed debt world, with well-known players such as Aurelius Capital Management, Golden Tree Partners, BlackRock Inc. and Brookfield Asset Management. Elliott Management Corp. and Cerberus Capital Management flirted with the idea of helping the company emerge from bankruptcy with billion-dollar-plus investments, but backed away. A potential investor from Egypt, Naguib Sawiris, also came and went.
Tanure has been the constant figure in the battle over Oi’s future, orchestrating the chaos from the elegant offices of his investment firm, Societe Mondiale, in Rio. The panoramic windows in his boardroom, lined with vintage books and sculptures, offer serene views of Botafogo beach and Pao de Acucar mountain. Tanure, in an open collar, welcomes visitors with disarming charm, chatting fluently in English and Portuguese about Brazilian politics and modern art.
But Tanure is no shrinking violet. He’s made a name for himself as a litigious rabble-rouser, picking fights over investments such as Gazeta Mercantil, a financial newspaper, and Petro Rio SA, formerly known as HRT Oil & Gas. Tanure started investing in Oi last year, when the stock was at the bottom, and eventually secured enough seats and alliances on the board to push his vision for the company. He claims for himself the task of restoring the company to greatness.
“I’m a Brazilian investor; here I know what I’m doing,” Tanure said. “Oi is a Brazilian company with huge growth potential, and that’s why we began to invest in it. With this great potential, it certainly could occupy that No. 1 spot in the country’s telecommunications sector.”
To accomplish his goals, Tanure wants to stay in charge of Oi, and that’s the sticking point with bondholders, who say they deserve to end up with a majority of the company. Last week, board members representing Societe Mondiale helped engineer a surprise set of decisions to further Tanure’s plans, installing two members in management positions and rejecting a proposal from creditors. The largest bondholder groups called the moves “an outrageous violation of corporate governance standards.”
Tanure, 65, defends his plan as the only concrete proposal to bring Oi back to financial health, and he said he’s willing to work with anybody who is also committed to Oi’s recovery. But creditors say he’s unwilling to find common ground with them and really intends to lead the company into insolvency and sell it off for scraps.
President Temer has assigned Attorney General Grace Mendonca to head the government’s task force sorting out the Oi mess. Mendonca went to Rio last month to meet with Judge Fernando Viana, who is presiding over the case.
Visiting the judge’s chambers requires passing through a five-building complex near Rio’s airport with endless corridors covered in brown granite. Low-volume pop music plays over the din of elevator operators yelling which direction they’re going. Oi’s judicial recovery is being processed in a tiny room on the seventh floor of the central building.
An antechamber outside the judge’s office is crowded with piles of file folders with pale-pink paper covers, each containing about 200 pages, according to the judge’s administrator. Luckily, Oi’s case is totally digital, because it has produced the equivalent of 200,000 pages of documents, far too many to squeeze in the room. The size of the case and the quantity of interested parties has actually slowed down the court’s website, and tech support is trying to fix it, the administrator said.
Judge Viana, clean-shaven and dressed neatly in shirt and tie, with a new-wave hair style and thin, rectangular glasses perched on his nose, declined to discuss details of the case. But in a short meeting in his office, decorated with reproductions of Van Gogh’s “Starry Night” and “Irises,” he described how he viewed his role in Brazil’s largest-ever bankruptcy case as a matter of fate.
The details of the case are so unique, and the facts so complex and time-consuming, that all the major players involved talk about Oi with a sense of gravity beyond a typical fight over a distressed company. Thousands of workers, millions of customers and the nation’s infrastructure and even pride are at stake.
At some point during the saga, Schroeder and his wife stopped taking their regular strolls on the Ipanema beach. He grew tired of people coming up to him every 10 minutes to ask him about Oi’s future.
“We’re under pressure every single day,” Schroeder says. “My motto is: Do right and fear no man.”