TEXT-Fitch revises Oi SA outlook to negative, affirms ratings

Wed Jan 30, 2013 1:13pm EST

Jan 30 - Fitch Ratings has affirmed ratings for Oi, S.A. (Oi) as
follows:

--Local Currency Issuer Default Rating (IDR) at 'BBB';
--Foreign Currency IDR at 'BBB';
--National scale rating at 'AAA(bra)';
--BRL1 billion senior notes due 2022 at 'BBB';
--US$1.75 billion senior notes due 2020 at 'BBB';
--US$750 million senior notes due 2019 at 'BBB';
--EUR750 million senior notes due 2017 at 'BBB';
--BRL2.25 billion fifth debenture issuance maturing 2014 & 2020 at 'AAA(bra)';
--BRL1.1 billion senior notes due 2016 at 'BBB'.

Fitch has also affirmed Telemar Norte Leste S.A.'s local and foreign currency
IDRs at 'BBB' and national scale rating at 'AAA(bra)' and simultaneously
withdrawn the ratings. Since the Oi restructuring, all market debt issued by
Telemar was transferred to Oi.

The Rating Outlook is revised to Negative from Stable.

SENSITIVITY/RATINGS DRIVERS:

The revision of the Rating Outlook to Negative reflects Fitch's concerns the
company may not meet its financial targets going forward given the current high
leverage and competitive environment. Fitch expects a gradual reduction in net
leverage by 2014 and 2015. Failure to reach net leverage of 2.2x by 2015 or
perception by Fitch that the company is not making progress toward achieving
this level due to weak operating results, higher investments/distributions to
shareholders or weak economic conditions are likely to result in a downgrade.
Factors that would support revising the Rating Outlook to Stable include Oi
making firm progress toward reducing leverage in conjunction with stable
operating performance and cash flow generation or improved operating performance
and profitability.

Oi's ratings incorporate its strong market position, business scale, diverse
service platforms, moderate regulatory risk, cash flow generation and a
manageable debt maturity profile. High leverage and intense competition temper
the credit quality. The ratings also take into account the strategic plan put in
place to improve the company's competitive position and operating results, as
well as Fitch's belief that the recent change in the CEO position will not alter
business or financial profile.

High Leverage:

Oi's ratings factor in that net leverage should trend to 2.2x by 2015 from the
recent level of 3.0x as of Sept. 30, 2012. Failure to meet this target or
expectation that it will not be achieved would result in a downgrade as current
leverage is high for the rating category. Fitch notes that Oi has some
flexibility to meet the target in the case of a negative event by adjusting its
capex and by selling non-core assets. In addition, any settlement of claims can
result in releasing funds from judicial deposits; however, the outcome is
uncertain. As of Sept. 30, 2012 Oi had BRL11.6 billion in cash in judicial
deposits, and cash flow from the first nine months of 2012 was affected by a net
outflow of BRL1.4 billion to judicial deposits.

Residential Revenues Stabilizing:

Capital expenditures to fund the strategic plan have increased leverage. The
2012-2015 strategic plan is targeted to reduce fixed-line churn, increase market
share in the corporate segment, and support mobile services. Fixed lines in
service continue to decline; however, recent trends in the residential segment
have improved and appear to be stabilizing as broadband and pay-TV have more
than offset revenue losses associated with fixed lines over the past two
quarters, improving residential ARPU. FTTH and the launching of IPTV services
should continue to support residential revenues.

Mobile services growth continues to underpin Oi's revenues. The company
continues to focus on increasing the mix of postpaid users, which supports ARPU.
Mobile data growth should continue supporting revenues and should become
increasingly important in the mobile revenue mix. Fitch believes the corporate
segment offers some potential to grow given Oi's network coverage and presence
across Brazil and its low market share.

Capital expenditures expectation of BRL6 billion and dividend of BRL2 billion
should limit free cash flow during 2013. Network investments for increasing
capacity and coverage for mobile and broadband services should support revenues
in 2014. EBITDA is expected to improve in 2013 when compared to 2012; however,
net leverage is not expected to start declining until 2014.

Manageable Liquidity

Liquidity is underpinned by adequate cash balances, generation of cash flow from
operations, access to credit, and a manageable debt maturity profile. In
addition, the company has two committed credit facilities, for US$1 billion and
BRL1.5 billion. For the 12 months ended Sept. 30, 2012, total net debt leverage
was 3.0x and preliminary results for 2012 indicate that net leverage finished
2012 at 2.8x. As of Sept. 30, 2012, total consolidated debt was BRL31.8 billion,
composed of 16% BNDES debt, 19% financial institutions, 26% local debentures,
29% international bonds, and the remainder, international development banks.
After hedges, only 2% of total debt has exposure to foreign currency. Cash
balances are sufficient to meet short-term maturities.

Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 18, 2012);
--'Rating Telecom Companies-Sector Credit Factors' (Aug. 9, 2012);
--'Parent and Subsidiary Rating Linkage (Fitch's Approach to Rating Entities
Within a Corporate Group Structure)' (Aug. 18, 2012);

Applicable Criteria and Related Research:
Parent and Subsidiary Rating Linkage
Rating Telecom Companies
Corporate Rating Methodology