Bond group grows amid Brazil's Oi bankruptcy plan, sources say

SAO PAULO (Reuters) - A group representing holders of Oi SA’s bonds not guaranteed by unit Telemar Norte Leste SA is growing, two sources familiar with the matter said, underscoring the challenges facing Brazil’s largest fixed-line phone carrier as it enters bankruptcy protection proceedings.

The headquarters of the Brazil's largest fixed-line telecoms group Oi, is pictured in Rio de Janeiro, Brazil, June 22, 2016. REUTERS/Sergio Moraes

New York-based investment bank Houlihan Lokey Inc and Metrica Investments LLC have stepped up talks with owners of $6.4 billion worth of euro- and U.S. dollar-denominated Oi bonds in the wake of the largest bankruptcy protection filing in Brazilian history, the sources said on Thursday. Oi filed for bankruptcy protection on Monday.

The Houlihan-Metrica group is one of the few gearing up for tough bankruptcy talks with Oi, which succumbed to a heavy debt burden and mounting competition after years of shareholder disputes. At 65.4 billion reais ($19.4 billion), Oi’s petition is fraught with challenges due to a complex capital structure and wide creditor base, analysts said.

With Oi entering formal bankruptcy proceedings, uncertainty about recovery values is mounting for holders of Oi debt not guaranteed by Telemar - especially for those owning notes issued by Oi subsidiary Portugal Telecom International Finance BV that are due in July, Credit Agricole analysts said.

A disparate base of creditors, the multiple currencies of issuance and a range of bonds in which liabilities from several units are consolidated at the holding company level could slow Oi’s bankruptcy proceedings, the analysts said.

More than 15 different firms holding 4.5 billion euros ($4.9 billion) in debt due between this year and 2021 and $1.5 billion in a 5.75 percent dollar bond due in 2022 have recently agreed to join the Houlihan-Metrica group, said the first source, who requested anonymity since the matter remains confidential.

The same source expects the Houlihan-Metrica group to grow considerably as a significant number of European individual investors own the Portugal Telecom International 6.25 percent bond due next month.

One of the potential creditors that could join the group is distressed debt fund Aurelius Capital Management LLC, which sued Oi in the Netherlands over the Portugal Telecom bonds, said the first source. Neither source agreed to discuss potential negotiation strategies.

The firms declined to comment.


“We believe that there is room for more advantageous relative recovery values in the process,” the first source said of the group’s bond holdings. “That’s what drives the group.”

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Persuading unsecured creditors to pass the reorganization plan will be vital for Oi, because they have diverging interests, according to the second source.

Apart from bondholders with and without guarantees of Telemar, another force within unsecured creditors is represented by Oi real-denominated note holders. In recent bankruptcy processes, the latter have received unfair advantages at the expense of foreign bondholders, the source added.

“There are precedents” of such unfair treatment to foreign bondholders, the source added.

Before securing court protection against creditors on Tuesday, Oi had engaged in restructuring talks with a group of over 30 investment firms advised by Moelis & Co for more than two months. Reuters previously reported that the Moelis-led group included BlackRock Inc, Citadel LLC and Pacific Investment Management Co.

The Moelis group represented bondholders with both debt guaranteed by the holding company and the Telemar subsidiary.

Prior to the bankruptcy filing, the parties discussed a debt-for-equity swap that entailed a recovery rate of 50 percent for holders of Telemar-backed bonds and only 17.5 percent for the non-Telemar bondholders, who would receive more equity in return.

The departure of former Oi Chief Executive Officer Bayard Gontijo accelerated the decision to file for court protection, after a majority of the company’s board opposed the direction of talks with the Moelis-led group.

One of those shareholders, Pharol SGPS SA, criticized Gontijo’s support for a creditor proposal that would give them a 95 percent stake in Oi.

“In addition to operational and regulatory challenges, Oi’s complicated capital structure may also lead to long, drawn-out bankruptcy proceedings, creating further risks for recovery values,” said Robert Jaeger, an analyst with Societe Generale.


Holders of credit default swaps on the Portugal Telecom International bonds will try to trigger payment on about $1 billion worth of contracts as early as Friday, when a committee of 15 banks and investors coordinated by derivatives group ISDA will look into the matter.

In a statement, ISDA said a meeting will be convened on Friday related to Oi’s decision to file for bankruptcy protection and whether it constitutes a credit event that would trigger payment on the contracts.

Reuters reported in April that Aurelius and Elliot Management Corp were among the firms holding a sizable part of the $1 billion in net CDS exposure to Oi.

Editing by Alan Crosby and Matthew Lewis