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, the company said it and adviser PJT Partners Inc launched talks with a group of bondholders that hired Moelis & Co as their consultant.
Reuters reported earlier in the day that the group, which includes Pacific Investment Management Co, BlackRock Inc and Citadel LLC, may sign a non-disclosure agreement as early as Monday.
Oi "intends to conclude the ongoing restructuring process promptly, as it believes that conducting negotiations with a single steering committee representing the company's bondholders will facilitate the debt reorganization process and make it more agile," the filing said.
The decision to kick off 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.
Oi wants to negotiate with bondholders who "care about the company's future," said a source, who requested anonymity to speak freely about the plan.
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. The Oi deal 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.
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.
Some 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.
"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.
York-based PJT declined to comment on the process. Oi hired PJT in February to oversee the restructuring.
UNSUSTAINABLE
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 may make a quick resolution hard, said Francisco Velasco, a fixed-income analyst with Exotix Partners.
With the widespread notion that Oi's equity is worthless, debt holders may seek to thwart any deal aiming to protect shareholders, analysts at Nomura International and Jefferies LLC recently said.
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," he said in an interview.
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.
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, citing unnamed sources, reported last week that Oi feared that some bondholders who bought CDS were trying to push it into default. The company's lawyers were looking for ways to offset the actions of 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 could 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. Oi, Brazil's No. 4 wireless phone carrier, also has the largest fixed-line network that 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 and Alan Crosby)
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