Brazil's Oi starts $14.3 billion bond restructuring talks

By Guillermo Parra-Bernal

SAO PAULO (Reuters) - Oi SA (OIBR3.SA) on Monday formally started talks to restructure $14.3 billion of bonds, pitting some of the world's biggest investors against each other as Brazil's most-indebted phone carrier fights for its survival.

In a securities filing, Oi said a group of bondholders that have Moelis & Co as their advisor signed a non-disclosure agreement to join talks. Reuters, citing sources, said the group of over 25 investment firms including BlackRock Inc, Citadel LLC and Pacific Investment Management Co, could sign the accord as early as Monday.

The decision to begin talks with the Moelis-advised group leaves unclear how, or whether, Oi will negotiate with other creditors such as hedge funds that have bought credit default swaps linked to Oi's bonds. The carrier wants to negotiate with bondholders who "care about the company's future," one of those sources told Reuters.

At stake is the fate of Oi, the byproduct of a state-sponsored merger eight years ago and the only Brazilian carrier controlled by domestic capital. Shareholders see a restructuring facilitating a potential takeover of Oi, which they say could help narrow the gap with rivals controlled by Spain's Telefónica SA and Mexican billionaire Carlos Slim's América Móvil SAB.

Oi "intends to conclude the ongoing restructuring process promptly, as it believes that conducting negotiations with a sole steering committee representing the company's bondholders will make the process more agile," the filing said.

Shares posted their biggest intraday jump in 23 years on Monday, on hopes the tack could speed Oi's turnaround. Nonvoting shares (OIBR4.SA) rallied 28 percent to 1.18 reais, helping pare the stock's 53 percent slump this year.

Still, a disparate base of creditors, the multiple currencies of issuance and a complex debt structure in which liabilities from several units are consolidated at the holding company level, could make a quick resolution hard, said Francisco Velasco, a fixed-income analyst with Exotix Partners.

Oi's restructuring would be Latin America's second-biggest ever, behind a $15 billion debt overhaul by Mexican cement maker Cemex SAB in 2009, data compiled by Thomson Reuters showed. It would also dwarf the $5.2 billion restructuring of former billionaire Eike Batista's OGX Petróleo e Gás SA two years ago, heretofore the largest such deal in the country.

"Different investors could embrace different strategies, making this situation like a four-player chess game in which you won't understand anybody's strategy until the very last minute," said Paolo Gorgó, an Italy-based investor who analyzes distressed debt and turnaround cases for several newsletters.

Both Oi and New York-based PJT Partners Inc, which was hired in February to oversee the restructuring, declined to comment. According to the filing, law firms Barbosa Müssnich & Aragão and White & Case LLP were brought in as Oi's legal consultants.

UNSUSTAINABLE

At 54.9 billion reais ($15.4 billion), Oi's gross debt looks unsustainable at this point, with almost half of it maturing by the end of 2017. Debt-servicing also poses a challenge for Oi, whose debt is 75 percent denominated in currencies other than the Brazilian real, which fell 16 percent against the U.S. dollar over the past two years.

Oi has almost 200 different bondholders spanning from Brazil and the United States to Switzerland and Chile. About ten bond firms who did not join the Moelis-advised group have hired Houlihan Lokey Inc to form their own, a source familiar with the matter told Reuters last week.

Negotiations "will not be easy as there is the potential for high inter-creditor conflict, with different types of creditors looking to make the most for themselves, for which the process could be extended in time," Exotix's Velasco said.

With the widespread notion that Oi's equity is worthless, creditors may also seek to thwart any deal aiming to protect shareholders.

The price on the May 2020 issued by Oi's Portugal Telecom Intl Finance BV subsidiary accelerated losses on the news. The security shed 0.07 cent on the dollar to 27 cents on Monday.

The cost of insuring the Oi subsidiary's bonds for one year through credit default swaps (BRTO1YUSAC=MP) were unchanged on Monday at $620,000 per every $1 million of principal protected.

CREDIT DEFAULT SWAPS

Creditors whose positions in credit swaps surpass their bondholdings by a large margin have an incentive to disrupt talks or trigger events that could force Oi into a default, Gorgó and other analysts said.

According to the sources, the amount of net notional positions on Oi's CDS is around $1 billion. Some creditors identified billionaire Paul Singer's Elliot Management Corp, the fund that recently won a $4.7 billion, 13-year defaulted debt battle with Argentina, as one buyer of Oi's CDS.

A spokesman for New York-based Elliot declined to comment.

Bloomberg News reported last week that Oi feared that some bondholders who bought CDS were trying to push it into default. Lawyers for Oi were looking for ways to offset plans by those investors, the report said.

Other elements could also turn negotiations even more protracted, bondholders and analysts said.

Brazil's harshest recession in a century, and a political crisis that has delayed a long-sought overhaul in industry rules that would eventually favor Oi, may discourage bondholders from giving the company further breathing room.

The revamped laws could significantly reduce Oi's mandatory capital spending in fixed-line telephony, where the company loses money on a regular basis.

(Aditional reporting by Tatiana Bautzer in São Paulo and Jennifer Ablan and Matthew Toole in New York; Editing by Christian Plumb, Alan Crosby and Meredith Mazzilli)