Oi bondholders’ debt-for-equity quest gets harder after shareholder agreement

15 September 2016

by Camila Dias, and Lucy Monteiro

 

The agreement between Oi (D/D) shareholders Pharol and Societe Mondiale has added another layer of difficulty to bondholders’ desire to get equity in the Brazilian telecom’s bankruptcy process, according to three sources close and one familiar with the matter. It is clear for both sides that Oi will have to give up some equity – thanks to bondholder voting power over any proposal – but the changes in the board suggest shareholders fighting hard to avoid dilution, the sources said.

 

The recovery plan submitted to court 5 September offered no immediate equity to creditors, only convertible bonds, and a 70% haircut. Bondholders rejected it, and expected a second offer would be forthcoming, ideally after direct negotiations. However, the board has changed this week.

 

“The company’s board gets even more power after the agreement between the shareholders, as both of them do not want to be diluted in a debt-for-equity exchange,” the first source close said. “However, something will have to be negotiated, as it is not in the shareholders’ interest to take the company to the insolvency.”

 

Societe Mondiale, led by investor Nelson Tanure, holds 7% of Oi’s ordinary shares and 3.45% of preferred shares, representing 6.32% of the total capital. Pharol is the former PT Portugal SGPS and owes 27.49% of Oi’s ordinary shares, representing 22.24% of the total. Before signing the agreement with Pharol, Societe Mondiale had been calling for the replacement of the Portuguese telecom’s appointees on Oi’s board.

 

“Pharol and Tanure aligned add aggressiveness to the process,” the source familiar said. “Each will try to preserve their capital, their stake in the company, while bondholders were clear they want equity – so the arm-wrestling will be strong,” the same source said.

 

Pharol and Societe have appointed Demian Fiocca, former CEO of the BNDES government development bank, and Helio Costa, former Brazilian minister of communications, to the board of directors. They replace Marcos Grodetzky and Ricardo Martins, who resigned on 12 September. Martins stepped down in order to become Oi’s CFO, replacing Flavio Guimaraes, who left the company.

 

An exchange of debt for equity is the starting point of any future negotiation, the second source close said.

 

“The debt-for-equity exchange is a basic premise,” the second source said. “Without that … it’s insolvency.”

 

However, Tanure’s historic profile shows that he has no disposition to negotiate, the second source close said. This includes a dispute with another Brazilian telecom, TIM.

 

“The fear is that those two new board members could have some influence over the others currently not linked to Pharol or Societe,” the second source close said.

 

If Oi prepares a new plan to present to creditors before or during a creditor meeting, it will require approval of its terms from the board.

 

Bondholders continue talking to other creditors, such as banks and ECAs, and are weighing all possible alternatives, the third source close said.

 

“Creditors expect a tougher negotiation but they still believe that there will be a negotiation before a new plan is presented by the company,” the third source close said. “It is in no one’s interest to let the company bleed to death.”

 

Certain Oi bondholders would consider offering new funding to the Brazilian telecom, if it agreed to the desired debt-for-equity exchange. Before filing for bankruptcy protection on 20 June, Oi had been negotiating an agreement with a bondholder group in which bondholders were requesting 95% of Oi’s equity in exchange of existing debt.

 

The ad hoc group of bondholders is advised by Moelis & CompanyCleary Gottlieb and Pinheiro Neto Advogados are the legal advisors.

 

Oi has retained PJT Partners as financial advisor, while White & Caseand BMA – Barbosa Mussnich, Aragao act as legal advisors.

 

The ad hoc group of bondholders’ spokesperson and a Societe Mondiale pressperson declined to comment on the matter. Pharol’s IR department did not respond to a request for comment.