Brazil's Oi sees bonds, shares slump on Portugal worries

Thu Jul 10, 2014 2:07pm EDT

NEW YORK, July 10 (IFR) - Brazilian wireless and fixed-line carrier Oi's bonds and shares tumbled Thursday on concerns that a pending mega-merger with Portugal Telecom may be threatened by accounting irregularities at Portugal's Banco Espirito Santo.

Investors are fretting about the credit risks from Portugal Telecom's purchase of EUR897m in commercial paper issued by RioForte, which is owned by Espirito Santo International, an entity now under investigation for alleged breaches in company law.

Oi said that such investments were not disclosed prior to it agreeing to merge with Portugal Telecom.

"The best case scenario is that they somehow manage to get the money back from RioForte, but in reality they'll either have to roll the CP or take a big write-down," said a high-yield bond investor.

Such fears sent Oi stock to a historic low on Thursday morning of BRL1.60 per share on the Bovespa.

Meanwhile the company's most liquid 2022 bonds tumbled two points to 94.75 mid-market and were significantly wider in spread terms due to Treasury moves, said a senior trader in New York.

"The downside for bondholders is that they lose all the money and the deal with Oi falls apart," added the high-yield bond investor.

News that Espirito Santo Financial Group had suspended the trading of its shares and bonds triggered a broader selloff this morning as investors fretted about the health of the parent company of Banco Espirito Santo (BES) - Portugal's largest bank and the biggest shareholder in Portugal Telecom.

BES bonds were already under pressure on talk about a potential debt restructuring at the group level and accounting irregularities at Espirito Santo International (ESI), a private company owned by the founding Espirito Santo family.

"The problem with the BES issue is that we don't know if there are other banks also in the same boat," said the trader.

"The question here is whether BES is the canary in the coal mine and there are others waiting, or if it's a one-off and people are overreacting. I think people have gone a little too far in how they've reacted."

In late April, Oi took the biggest step yet toward combining with partner Portugal Telecom SGPS by raising BRL8.25bn (US$3.7bn) through the sale of common and preferred stock to local and foreign investors as well as a fund led by Grupo BTG Pactual SA, the deal's main adviser. Including an asset swap with Portugal Telecom, the transaction was worth BRL13.95bn.

Proceeds were being used to reduce Oi's stifling debt load. The recapitalized Oi, which also controls Brazil's fourth-largest mobile phone carrier, plans to use its stronger balance sheet to form CorpCo, the proposed name of the company after the tie-up with Portugal Telecom.

Portugal's version of the SEC, the CMVM, is looking into PT's purchase of RioForte debt and making sure it adhered to disclosure rules, but it is not a formal investigation, according to Reuters.

Under the terms of the merger, Portugal Telecom will contribute its assets, excluding its stake in Oi, and own 38% of the new company. Oi's major shareholders excluding Portugal Telecom would have as much as 30% of CorpCo.

Moody's and S&P upgraded Portugal Telecom's credit rating to investment grade last month, lifting its debt out of high-yield indices, but bond investors are now wondering if the disquiet about the RioForte investment could send them crashing back down.

The catalyst for the upgrade was the merger with Oi, with Moody's upgrading the issuer two notches to Baa3 on June 18 and S&P following suit with a two-notch upgrade to BBB- on June 25. (Reporting by Joan Magee; Editing by Paul Kilby and Marc Carnegie)

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