CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded Oi S.A.'s (Oi) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) and its senior unsecured notes to 'C' from 'CCC'. Fitch has also downgraded the company's National Long-Term Rating and local debentures rating to 'C(bra)' from 'CCC(bra)'. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
Debt Restructuring Negotiation Underway
The downgrade reflects Oi's ongoing negotiation with its bondholders' representatives with regards to a potential restructuring of the company's capital structure, as disclosed on June 17, 2016. The company made a proposal for potential restructuring on June 6, 2016, which was countered with revised terms by the noteholders on June 11, 2016. While the negotiation continues, Oi has yet to respond or made a counterproposal to the noteholders' terms.
Material Haircut Proposed
The original proposal made by Oi, and the counter proposal by the noteholders both indicate a potential sharp cut to the terms of Oi's notes, resulting in low recovery prospects. The terms of Oi's proposal indicate 35% recovery for the notes guaranteed by Telemar Norte Leste, S.A. (Telemar), and 25% recovery for its other senior unsecured notes, with 50% of the reduced debt principal exchanged to new secured notes due 2021 and 2023, and the remainder converted to the company's equity.
The counter proposal by Oi's noteholders also suggests a similar level of steep haircut, indicating a 50% recovery for Telemar-guaranteed notes and 17.5% recovery for other senior unsecured notes, with noteholders taking up 95% of the equity stake in post-restructuring Oi. It remains unclear if Oi's current shareholders would agree to such material dilution in its ownership, which could hinder a progress on the ongoing restructuring negotiation.
Default Unavoidable Absent Restructuring
Oi's current capital structure is unsustainable, and the company faces an imminent default risk given sizable short-term debt maturities. Based on the company's liquidity projection, disclosed on June 17, 2016, the company is forecast to consume most of its cash to meet its debt service obligation by end-2016, in line with Fitch's projection. As of March 31, 2016, the company's cash balance amounted to BRL8.4 billion while its short-term gross debt maturities were BRL8.1 billion.
Fitch's key assumptions within the rating case for Oi include:
--Negative FCF generation to remain uncurbed in 2016 due to high interest expenses and capex, amid falling EBITDA
--Oi to deplete its cash balance by end-2016 in the absence of debt restructuring
Fitch believes that a default on the company's debt obligations in the near term is imminent. Ratings could be further downgraded to 'RD' if the company experiences an uncured payment default on its material financial obligations, such as its bonds or loans, or executes a distressed debt exchange.
A ratings upgrade is considered unlikely prior to the possible restructuring that may take place.
Oi's liquidity profile is vulnerable given the large upcoming debt maturities in 2016 and 2017, and the company's limited access to capital markets. The company held a readily available cash balance of BRL8.4 billion as of March 31, 2016 which compares to its short-term debt maturities of BRL8.1 billion. Fitch projects this cash balance will be quickly eroded given continued negative FCF generation.
FULL LIST OF RATING ACTIONS
Fitch has downgraded the following ratings:
--Long-Term Foreign-Currency and Local-Currency IDRs to 'C' from 'CCC';
--National Long-Term Rating to 'C(bra)' from 'CCC(bra)';
--Telemar Norte Leste, S.A.'s (Telemar) senior notes, originally due 2017, 2019, and 2020, to 'C/RR4' from 'CCC+/RR3';
--All outstanding foreign-currency senior unsecured notes to 'C/RR5' from 'CCC/RR4';
--Local debentures to 'C(bra)' from 'CCC(bra)'.
Oi Brasil Holdings Cooperatief U.A. (Oi Netherlands)
--EUR600 million senior notes due 2021 to 'C/RR5' from 'CCC/RR4'.
Telemar's notes, rated 'C/RR4', reflect average recovery prospects in the event of default, given the company's position as the main cash flow generator with operating assets. Securities rated 'RR4' have characteristics consistent with securities historically recovering 31% - 50% of current principal and related interest, which is in line with the proposals by Oi and noteholders. The 'RR5' Recovery Rating on Oi's other senior unsecured notes reflect below-average recovery prospects, in the range of 11% - 30%, in line with the proposals by Oi and its noteholders.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Dodd-Frank Rating Information Disclosure Form