Will the Bankruptcy of Oi in Brazil Have an Effect on U.S. Markets?

On June 10, 2016, former Oi CEO Bayard Gontijo resigned from the company after it was obvious that his attempts to negotiate a new debt settlement with shareholders was about to fall apart. Oi SA is the fourth largest mobile telecom company in Brazil, and it is the only telecom company in the country partially funded by the government.

In 2010, Oi signed an agreement with the Brazilian government to expand the country’s archaic and failing landline system to rural customers. After years of sinking millions of dollars into that expansion and the effect of other economic factors, the company finally had to admit that it was in trouble and filed for bankruptcy in Brazil on June 20, 2016. At $19.3 billion dollars, the Oi bankruptcy is the largest in Brazil’s history.

What Happened?

Over the past several years, Oi has suffered from poor managerial decisions and money mismanagement. The agreement to maintain and expand the landline system in Brazil instead of working to expand the growing wireless communications systems wound up costing the company millions.

Initially, Gontijo was attempting to negotiate a deal with shareholders that would wind up giving 92 percent of the ownership of the company to a group of bond holders and larger shareholders. The members of the board and other shareholders were not prepared to have their interests in the company diluted in that way, so Gontijo resigned. The financial world was shocked when Oi decided, after Gontijo’s departure, that filing the largest bankruptcy in Brazilian history was the answer to its problems.

Why Everything Went Wrong

A few years ago, Oi merged with Portugal Telecom to try and expand its market and bring in more revenue to offset the growing financial burden of maintaining and updating Brazil’s landline system. In the process, Portugal Telecom became one of the largest bond holders for Oi, and a major financial burden.

The $260 million bond payment to Portugal Telecom was set to come due in July 2016. Oi announced that unless some sort of debt reconfiguration plan was agreed to soon, then 92 percent of the company’s cash would be gone by the end of December 2016. This made Portugal Telecom nervous, and cause Portugal Telecom to put more pressure on Oi to come up with a payment solution.

Aurelius Capital Management is an American-based hedge fund that is heavily invested in Oi, and Aurelius has put together a group of shareholders that are pressuring Oi to create some plan for paying shareholders and bond holders back. The pressure from all of these financial elements caused Oi to decide to seek protection in the bankruptcy courts.

Oi maintains that Aurelius Capital Management is persistently blocking Oi’s attempts to restructure its debt, and the company needs protection from Aurelius and other American shareholders to complete its restructuring plan.

How Does This Affect the U.S.?

Brazil is the midst of a recession that has gone on for two years, and it’s one of the worst economic recessions that country has seen in the past 80 years. Even companies that are heavily invested in the country’s profitable oil industry are filing for protection from bankruptcy. The financial ripple effect is even reaching the United States, where Oi has filed for Chapter 15 bankruptcy protection in the New York bankruptcy court, which is the part of the United States bankruptcy laws set aside for foreign companies.

In addition, many U.S. telecom companies have infrastructure resources in Brazil. Depending on the outcome of the bankruptcy, some of the U.S. telecom operators with assets in Brazil may need to seek alternative routing and infrastructure as services may be at risk for disruptions and support may be limited if wide scale layoffs occur.

The situation for Oi is bleak. A weak economy and a set of Brazilian business laws that prevent the company from being able to take the actions it says it needs to take to become solvent could mean even more problems for the troubled carrier. Since the Brazilian government relies so heavily on Oi for the country’s national landline system, some experts are speculating that the government may bail the company out. But with the financial turmoil going on in Brazil right now, there may not be enough money to help Oi climb out of its financial pit.