Brazil's Oi back in the eye of the storm

Brazilian telco Oi shares are trading at record lows on the São Paulo stock market following media reports that watchdog Anatel is considering taking control of the company and even stripping it of some of its permits due to the deterioration of the company’s financial situation.

On Friday, daily O Estado de Sao Paulo reported that Oi had warned Anatel that it could be left without cash by February 2020, posing a risk to the continuity of critical telcom services provided to millions of people.

According to the paper, the carrier added that if its judicial restructuring plan collapsed, the way forward would be the liquidation of assets and reimbursement of creditors.

Both Oi and Anatel downplayed down the reports.

Sul Ahmad, associate director, Latin America corporate ratings at Fitch, said that new funds that are expected to come into the company's coffers in the coming months should be enough to keep operations up and running for some time.

“From our position, the company has enough cash from operations to survive in the near term and continue investing heavily. The fiber deployment is picking up and mobile performance should stabilize in the near term as postpaid growth offsets prepaid,” Ahamad told BNamericas.

The analyst specifically cites the expected sale of Angolan subsidiary Unitel, the divestment of non-core assets and tax credits related to the calculation of the Cofins social welfare tax as sources of income.

The macroeconomic issues in Brazil economy and FX pressures are concerns, admitted the analyst, but they should not pose a major threat to the continuity of services, he added.

More than 3,000 cities across Brazil are served solely by Oi for fixed telephony. 

A source at the science, technology, innovation and communications ministry (MCTIC) told BNamericas that Oi's situation is being discussed by President Jair Bolsonaro's administration.

RENEWED INTERVENTION TALKS

According to O Estado de São Paulo, Anatel could be considering three different outcomes for the company: stripping it of its fixed telephony concession, a new company taking over the contract, or intervention to maintain fixed telephony operations.

This is not the first time that rumors of government intervention in Oi have emerged. 

Anatel is said to be concerned about the speed with which Oi has been burning through cash in recent months, according to the report. The company spent nearly 3.2bn reais (US$785mn) of its cash in the second quarter. However, net debt rose 25.5% year-on-year to 12.5bn reais and losses surged 24% to 1.55bn reais.

In a separate report, O Estado de São Paulo said that Oi is in negotiations with banks to raise another 2.5bn reais in cash by either issuing new shares or providing structured guarantees for debts.

In an earnings call, CFO Carlos Brandão said that the strong cash burn had been expected and he repeated that Oi has several options to bolster its cash. He also said that the firm's investments will start to pay off in the coming months.

In a statement issued on Friday, Anatel president Leonardo de Morais dismissed any “imminent possibility” of intervention in Oi or plans to strip the company of its fixed telephony concessions.

According to Morais, Oi has been monitored constantly since 2014.

After the company filed for bankruptcy protection in June 2016, this monitoring became more frequent and authorities began carrying it out together with the oversight of the corporate court responsible for Oi’s case in Rio de Janeiro.

Morais stressed that Anatel's priority is the continuity of services, considering the importance of Oi's companies as they are among the largest providers of telecom services in the country.

The regulator also stressed that a definitive market solution is the preferred scenario for Oi, while solutions of another nature would be “exceptional and a last resort,” depending on a host of conditions that are not in place.

In a statement, Oi also pointed out that the company is committed to the strategic plan announced in July.

“As Anatel itself confirmed in a public statement released today [Friday], there is a due process of follow up on the company’s activities in place, and no other considerations or discussions are in order at this time regarding the execution of the strategic plan,” The company wrote.

The company repeated that it is committed to the execution of the asset sale plan and the generation of liquidity to sustain its investment plan, and that it is working on different fronts to implement this objective.

RESIGNATIONS

On Monday, daily Valor reported that GoldenTree Asset Management, Oi's largest stakeholder with 14.5% of the company’s stock, is pushing for the resignation of the telco's chief administrators.

The paper said that the fund sent a letter to the company’s executive board setting the condition that, in order to make any new investment in the company should the sale of non-core assets be unsuccessful, CEO Eurico Teles would have to be replaced.

In the letter, dated Friday, GoldenTree cited fears that “the company's long-term future is seriously compromised by poor decisions, disappointing financial and operating performance and inability to enforce important corporate governance principles in the judicial reorganization plan,” according to Valor.