Investing.com -- Fitch Ratings has lowered the Foreign and Local Currency Long-Term Issuer Default Rating (IDR) of Oi S.A., a major telecommunications company, to ’C’ from ’CCC-’ on May 29, 2025. The National Long-Term rating has also been reduced to ’C(bra)’ from ’CCC-(bra)’. Oi’s USD655 million super senior secured notes due in June 2027 and USD1.4 billion subordinated secured debt PIK notes due in December 2028 were also downgraded to ’C’ with a Recovery Rating of ’RR4’ from ’CCC-’/’RR4’.
The downgrade is due to Oi’s deteriorating financial situation, marked by increased cash burn exceeding Fitch’s expectations. To avoid default, the company has been increasingly opting to pay-in-kind (PIK) its coupon obligations, indicating a very high credit risk and worsening payment conditions for holders of the 2027 bond and V.tal’s debentures. These actions could potentially lead to a distressed debt exchange, highlighting Oi’s urgent efforts to manage liquidity. The company aims to address these issues by 2026 through the sale of its 27.5% stake in V.tal and use the proceeds to fully repay these two obligations.
Fitch predicts that Oi will seek additional waivers for PIK coupons on its 2027 bond and 13th debenture issuance until it can successfully divest a significant portion of its asset portfolio. This includes a 27.5% stake in V.tal, valued at BRL13 billion, and nearly 7,500 real estate assets valued at BRL5 billion. Despite holding BRL1.4 billion in cash against BRL213 million in short-term debt in 1Q25, Oi obtained a waiver to PIK the quarterly coupon due March 31, amounting to BRL153 million. This waiver was sought from holders of 12.4% (or BRL4.4 billion) of Oi’s total face value debt.
Proceeds from the V.tal divestiture are planned to be used for pre-paying these debts. Fitch expects Oi to continue servicing the 8.75% coupon on the BRL50 million bond due July 2026, given its relatively small size. The remaining BRL31.4 billion face value debt is PIK until maturity, with significant amortizations scheduled for December 2028 (BRL5.5 billion) and December 2030 (BRL2.8 billion, extendable). The resolution of arbitration with the regulator ANATEL could also positively impact the company and accelerate deleveraging, although timing remains uncertain.
Fitch projects Oi will continue burning cash through 2025 and into 2026, primarily driven by negative EBITDA from its legacy fixed-line business, which will result in an unsustainable capital structure. Fitch expects annual negative EBITDA to reach approximately BRL2 billion in 2025 and BRL500 million in 2026. However, anticipated working capital inflows and reduced capital expenditures may mitigate losses, leading to negative FCF of BRL700 million in 2025 and BRL450 million in 2027.
Fitch expects Oi to sell its stake in V.tal by 2026, although timing and valuation remain uncertain. Delays in divesting could lead to additional coupon accruals and bring the company closer to the maturity dates for the super senior bond and debentures in June 2027. Market conditions will dictate whether Oi can sell its entire stake and achieve the BRL13 billion valuation from the ClientCo sale. Depending on the sale price, Oi might be able to eliminate BRL650 million in unsecured take-or-pay supplier debts obligation and amortize part of the roll-up debt.
Fitch views the sale of real estate assets as a positive step for Oi, despite its granular, uncertain, and gradual nature. The shift from a concession to an authorization regime has enabled the company to sell up to around 7,500 real estate assets, potentially valued around BRL5 billion. Proceeds from these sales are intended to reduce take-or-pay commitments with suppliers, with any remaining funds used for new money (if any amount is still outstanding), roll-up debt amortization and for the company’s operating activities. Additionally, the sale will lower fixed costs associated with maintaining these assets.
Fitch considers the resolution of Oi’s arbitration process with ANATEL crucial to the company’s financial turnaround, despite uncertainties related to timing and compensation outcomes. According to the waterfall of obligations, any arbitration proceeds would first be applied to settling BRL8.5 billion in fines with ANATEL. Subsequently, V.tal would be reimbursed for BRL5 billion in capex obligations advanced to Oi, and any remaining funds would be evenly divided between Oi and V.tal. This could also result in the suspension of onerous fixed-line obligations, such as commissions and insurance payments related to high provisions.
Oi’s ’C’ IDR reflects the company’s exceptionally high levels of credit risk where a default is perceived as imminent with the company most likely soliciting sequential waivers to PIK coupons, which represent a deterioration in the form of payment.
Fitch is using the liquidation value approach to estimate Recovery Ratings for Oi’s 2027 super senior and the 2028 subordinated secured bonds, respectively. The divestment program continues with the stake in V.tal valued at BRL13 billion expected for 2026. Despite good recovery value if Oi sells the V.tal shares at asked prices, Fitch caps the Recovery Ratings at ’RR4’ because Oi generates most of its revenue in Brazil.
Upgrades are unlikely in the short term. In the medium- to long-term, the rating could be upgraded if Oi sells a substantial part of its asset pool and reduces the overall debt that exempts the company to solicit waivers.
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