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Oi’s bankruptcy filing doesn’t mean it’s down and out just yet

While most media outlets have suggested that Oi Brasil’s request for bankruptcy protection is a total fall from grace, we want to take a step back and view the Brazilian operator’s move as a tactical reorganization of the company rather than one of sheer desperation.

The increasing debt piles and financial troubles of Oi are not exactly fresh news, having spent heavily on acquisitions and investment in its fixed line assets over the years, as well as the struggle to move away from its fixed line business and adapt to the surging mobile market in Brazil.

The operator must significantly reduce its $15.2 billion debt by selling off some of these assets, as well as make some sizeable cuts. In fact, if it wants to turn its cash positive by 2017 then realistically it has to reduce its gross debt by 65%, according to Swiss financial services company Credit Suisse.

Oi filed for bankruptcy protection this week after its shareholders voted against the plans to restructure $19.3 billion of debt, which is Brazil’s largest ever bankruptcy filing. Shareholders deemed this figure to be unstainable, and earlier this month CEO Bayard Gontijo left the company.

Bankruptcy filings are considered to be a particularly complicated process in Brazil and a similar case involving airline firm Viação Aérea Riograndense, which took four years to come to a resolution.

Rumors of a potential merger with TIM circulated and quickly dissipated at the tail end of last year, meaning hopes for consolidation to form a market leader in Brazil took a blow. These reports came about after Oi announced that Russian group LetterOne proposed a possible consolidation of the Brazilian telecom sector involving a combination with TIM Participações. Reportedly, the Russian company was prepared to invest up to $4 billion in Oi, TIM denied any involvement.

The recent recession and unstable political situation in Brazil have been major factors in Oi’s situation, which has in turn had a knock on effect on Banco do Brasil and Itau Unibanco Holding which both have holdings of Oi debt. However, Russian billionaire Mikhail Fridman, founder of LetterOne, and Egyptian businessman Naguib Sawiris may still reinitiate their hunt of Oi.

By our own research we see Latin America as the fastest growing broadband region in the world, driven by the largest two economies in Brazil and Mexico. Last year Brazil saw 15.8% broadband growth and we predicted this to mellow to 9.5% this year and slide down the scales as economic hardship slowly returns to Brazil. In fact, although Mexico’s broadband growth last year was a mere 7.8% we see this slowly coming into line with Brazil over the coming 5 years and actually overhauling it in 2020.

America Movil’s Net Servicos is the fastest growing operator, running on cable hardware, in Brazil adding around 920,000 broadband homes last year, with Oi not far behind at 723,000. In Mexico, Telmex is actually shrinking and the big grower there is Groupo Televisa trading under the brands Cablemas, Cablevision, Telecable and Cablecom.

Brazil’s pay TV market has gone into reverse and is in serious danger of being re-overtaken by Mexico as the region’s biggest pay TV market, sometime in 2017. Oi offers pay per view services Club Oi TV and Oi Filmes to a pay TV subscriber base of some 1.2 million. It also has around 49 million mobile customers, 13.6 million fixed phone customers, and 57 million broadband customers.

In 2013, Oi merged with stakeholders Portugal Telecom, but this deal was met with apprehension from minority shareholders who felt remaining debt would be too high.

Oi’s own reasoning for the bankruptcy protection was due to “obstacles confronted by management to finding a viable alternative with creditors,” according to a securities filing.

“It’s a nightmare scenario driven by macroeconomic factors and it is pushing our Brazil corporate portfolio into non-investment grade,” said Daniel Kastholm, Fitch Ratings regional group head for Latin America corporate finance.

“Given the uncertain political scenario, large debt renegotiations have become extremely complex because such agreements need to be based on mid and long-term macroeconomic forecasts,” says Bruno Caraciolo at De Faro Caraciolo Advogados law firm in São Paulo. “As such, it’s reasonable to expect that we’ll see more requests for bankruptcy protection from large debtors over the next few months, especially those that are more dependent on the public sector.”

“As anticipated, negotiations did not lead to any agreement between the parties, and investors were waiting for Oi’s next move,” said Paolo Gorgó, an investor specializing in distressed debt cases.

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