Oi SA files for largest bankruptcy in Brazilian history at $19bn

August 2016 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

Brazilian telecommunications giant Oi SA has filed for Chapter 15 bankruptcy protection in the US after the company and six of its subsidiaries filed the largest bankruptcy request in Brazil’s history in June.

Oi SA is Brazil’s leading fixed line telephone provider and fourth-biggest wireless company. According to court documentation submitted to the US bankruptcy court in Manhattan, Oi SA filed for bankruptcy protection citing a debt load of $19bn after failing to reach an agreement with its creditors over an out-of-court restructuring deal. However, the company’s problems have been ongoing for some time. The disagreement between the firm and its creditors was, in many respects, the straw that broke the proverbial camel’s back.

Oi SA has endured a difficult time of late with a long saga of mergers and leadership uncertainty all taking their toll on the company’s operations. On June 10, Bayard Gontijo, Oi SA’s chief executive, tendered his resignation in light of considerable shareholder pressure precipitated by a debt-for-equity swap proposed by the company’s creditors. Marco Schroeder was named to replace Mr Gontijo earlier in June, becoming the company’s sixth chief executive in five years.

The deal would have significantly diluted the company’s shares, giving a 95 percent stake of the restructured business to its bondholders. The collapse of that deal was critical for Mr Gontijo’s and the firm’s future. In the week prior to Oi SA’s filing, the company noted that without a debt restructuring deal, 92 percent of its existing cash would be depleted by year-end, thus making its future operations “unsustainable”. The company’s Brazilian bankruptcy must still be ratified by Oi SA’s shareholders. That decision is expected in late July.

Should the judge in the US approve the company’s Chapter 15 request, Oi SA would receive the benefits of US bankruptcy law. Accordingly, all lawsuits against the company would be stopped and creditors would be unable to seize the company’s assets, allowing Oi SA to focus on its domestic restructuring process. The stop would not only apply in the US but also in Brazil and the UK.

“The threat of additional adverse actions by creditors and the need for a centralised forum to facilitate its reorganisation compelled the company to begin preparations for a formal judicial restructuring,” said Ojas N. Shah, whom Oi SA appointed as its foreign representative in its US bankruptcy proceedings.

A “perfect storm of economic strain at the corporate, sector-wide, and national level” was how the company classified its reasons for bankruptcy in its court filings. The sharp recession afflicting the national economy has also taken its toll on Oi SA. The company has also been adversely affected by changes to the wider telecommunications space in Brazil. Oi SA has struggled to keep its head above water as the effect of mounting competition in mobile and data have taken their toll. The company’s mushrooming debt pile and the hangover of the firm’s state-sponsored merger eight years ago, which made fixed-line expansion targets mandatory for Oi SA, have also contributed to the malaise. The state-sponsored merger was designed to break the dominance of the telecoms market in Brazil by overseas companies.

The collapse of Oi SA will likely have considerable ramifications for the wider Brazilian economy. A number of state owned banks, including Banco Nacional de Desenvolvimento Economico e Social, Caixa Economica Federal and Banco do Brasil SA, are among Oi’s top creditors. Several private banks, including Itau Unibanco Holding SA, are also creditors who will be impacted by the filing.

Looking ahead to Oi SA’s reorganisation, Brazil’s telecommunications regulator Anatel said the company will need to win the agency’s consent if it hoped to sell off its assets or use them as collateral. According to a statement released by the agency, it will be monitoring Oi SA’s operations to “protect the user”.

Richard Summerfield