Fitch Ratings has downgraded
In addition, Fitch has downgraded Oi's unsecured senior notes due 2025 to 'CC'/'RR4' from 'CCC+'/'RR4', and
The downgrades reflect the increased likelihood of a debt restructuring along with Oi's unsustainable leverage, due to weak cash flow prospects and limited expected dividends over the next several years from its approximate 35% stake in V.tal. The downgrades also reflect Fitch's expectations of interest coverage below 1x, as well as the underperformance relative to Fitch's prior expectations of Oi's improved capital structure following asset sales.
Key Rating Drivers
Debt Restructuring Increasingly Likely: Oi has hired financial advisors to assist in negotiations with its creditors under the framework of its Judicial Recovery Plan. Fitch believes Oi has undertaken these negotiations to avoid potential insolvency, given the company's strained capital structure. In Fitch's view, if the outcome of these negotiations result in a material reduction in terms compared with the contractual terms agreed under the 2018 restructuring, the agency would downgrade the company's ratings to 'C'.
Unsustainable Leverage: The company is projected to reach EBITDA of
It is uncertain whether the company can capitalize on the optionality to take discounts on the face value of its debt for early repayment given that any meaningful inflow would need to come from the sale of its stake in V.tal, as the company is heavily FCF negative.
Lower than Expected Inflows: Net asset sales proceeds will be lower than previously expected as the company had
Weak Operating Performance: Oi's top line revenue growth has underperformed Fitch's expectations. The company's revenue contribution from fiber broadband and business to business services (Core business) has been insufficient to offset the decline in legacy businesses tied to copper infrastructure (non-core). In 2021, Oi's core business grew
Derivation Summary
Oi's ratings reflect its restructured financial profile and deteriorating outlook for its turnaround strategy. Compared to Latin American carriers in the low speculative grade/distressed territory, such as
The ratings are not constrained by
Key Assumptions
Fitch's Key Assumptions Within the Rating Case for the Issuer:
New Oi revenues in the
Homes passed grow in the four million to five million range;
Take up rates in the 20% to 21% range;
EBITDA margins of 12%-15%;
For the recovery analysis, Fitch estimates a going concern EBITDA of around
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch does not anticipate a positive rating action for Oi in the near term due to the expected high leverage and negative free cash flow.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The ratings will be downgraded to 'C' if there are indications that a default or default-like process has begun;
The launch of an exchange offer, which Fitch deems a material reduction in terms compared with the original contractual terms, and the exchange is conducted to avoid bankruptcy, similar insolvency or intervention proceedings, or a traditional payment default.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Weak Liquidity: Oi's liquidity is weak. The company is projected to be negative FCF during the rating horizon due to its weak interest coverage below 1x and capex of around
Issuer Profile
Oi owns copper telecommunications infrastructure and provides fiber optic and other digital services for residential and corporate customers.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visitwww.fitchratings.com/esg.
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