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