Oi Plans to Slash Debt Doubted by Bondholders: Brazil Credit

Tele Norte Leste Participacoes SA, the holding company that controls Brazil’s largest fixed-line telephone service provider and the most-indebted telecommunications operator in Latin America, says it will cut obligations relative to earnings by 50 percent this year. Bondholders aren’t convinced.

The company’s 5.5 percent bonds due in 2020 lost 2.4 percent in the past month, compared with an average 0.4 percent drop for Brazilian companies included in JPMorgan Chase & Co.’s CEMBI index. The yield rose to 6.02 percent on Feb. 10, the highest level since Dec. 20 and up from 5.67 percent on Jan. 21.

Chief Financial Officer Alex Zornig said Tele Norte Leste, operating under the Oi brand, plans to cut debt per earnings before interest to less than 1.7 by the end of 2011. The company will use some of the 11 billion reais ($6.6 billion) it aims to receive from share sales to investors and Portugal Telecom SGPS SA by March 31 to help pay or refinance 7 billion reais in debt coming due, he said in an interview. Obligations total 3.8 times Ebitda, the highest in the region for telecom companies valued at $200 million or more, data compiled by Bloomberg show.

“The fact that they are receiving money doesn’t prove they’re going to use that money well,” Vinicius Pasquarelli, an emerging-market debt trader for Tradition Asiel Securities Inc., a unit of Lausanne, Switzerland-based inter-dealer broker Compagnie Financiere Tradition SA, said in a telephone interview from New York. “So that makes the risk of the credit very tricky.”

Investment Grade
Foreign bonds sold by Latin American telecom companies yielded an average 5.87 percent as of Feb. 17, according to Credit Suisse Group AG. The Brazilian company’s yields compare with the 4.33 percent rates on investment-grade telecom bonds in the U.S. market, according to Bank of America Corp.

Bonds issued by Telemar group, which includes Tele Norte Leste and Telemar Norte Leste SA, carry investment grade ratings from Moody’s Investors Service, Standard & Poor’s and Fitch Ratings.

Long-term borrowings of Rio de Janeiro-based Tele Norte Leste almost tripled to 22.8 billion reais in the third quarter of 2010 from the same period three years earlier, after the company agreed to take over former rival Brasil Telecom SA in 2008, according to data compiled by Bloomberg.

“Debt is not a problem for Oi,” Zornig said in a phone interview from Sao Paulo on Feb. 17. “We are going to either roll it or pay it, whatever is cheaper for us and better for the stockholders.”

Because Telemar bonds are widely traded, they lead gains and declines in JPMorgan’s index, he said.

Cash Flow

Telemar shares rose 1 per cent to 50.60 reais in the past month in Sao Paulo trading, while Tele Norte Leste increased 0.6 percent to 27 reais. The advances compare with a 4 per cent drop in the benchmark Bovespa index.

S&P expects Telemar group debt to decrease over time, given the company’s cash flow and cash-in-hand position, Marcelo Schwarz, a ratings analyst, said in a phone interview from Sao Paulo Feb. 17. Oi’s cash flow was at 5.7 times the company’s net income in the third quarter. Oi also had 9.5 billion reais in cash and near cash items and short-term investments by the same period, according to data compiled by Bloomberg.

“In our scenario, we incorporate that the company will continue to deleverage,” said Schwarz, who has a BBB- rating on Telemar with a stable outlook.

Portugal Telecom’s deal with Telemar is also a positive for the company, Moody’s analysts Marcos Schmidt and Ricardo Kovacs said in a telephone interview from Sao Paulo Feb. 17.

‘Comfortable Position’
“It brings in cash, puts the company in a comfortable position,” Kovacs said. “Now the company needs to execute what it announced it would do.”

Moody’s has a Baa3 rating with a stable outlook on Tele Norte Leste and a rating one level higher at Baa2 for Telemar.

The extra yield investors demand to hold Brazilian dollar bonds instead of U.S. Treasuries widened 1 basis point to 176 on Feb. 18, according to JPMorgan Chase & Co.

The cost of protecting Brazilian bonds against default for five years fell 1 basis point to 115, according to CMA prices. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

The real dropped 0.1 percent to 1.6621 per U.S. dollar.

The yield on interest-rate futures contracts due in January 2012 was unchanged at 12.37 percent.

Acquisition
Portugal Telecom, based in Lisbon, agreed to buy at least 22 percent of Telemar Norte Leste on Jan. 26 for 8.32 billion reais in cash, six months after selling its stake in Vivo Participacoes SA, the country’s largest wireless operator, to Madrid-based Telefonica SA for 7.5 billion euros ($10.2 billion).

Oi, which provides Internet access, mobile, fixed-line and pay-television services, had a 19.4 percent share of the country’s wireless market in December, while market leader Vivo had 29.7 percent, according to Brazil’s telecommunications regulator.

Brazil, Africa and Portugal are Portugal Telecom’s strategic focuses, Zeinal Bava, the Lisbon-based company’s chief executive officer, told reporters Jan. 26. Portugal Telecom aims to replicate the turnaround it performed in Portugal of its own fixed-line business.

Telemar’s bonds at current prices may reflect investor concerns that the process of reducing debt may take longer than previously anticipated, said Luz Padilla, who helps manage about $7.5 billion at asset manager Doubleline Capital LP in Los Angeles.

“I’m not rushing out there to buy them,” she said. “They’re fair at this point.”