Moody’s might cut Oi

Moody's Investors Service said it placed the ratings of Oi SA, including its Baa3 global ratings, on review for possible downgrade.

The review was triggered by Oi's disclosure of a potential loss of up to €900 million from commercial paper investments made by Portugal Telecom SGPS SA (PT SGPS) which were contributed as part of Oi's capital increase in May of 2014.

The loss will reduce the consolidated entity's liquidity and could substantially delay Oi's progress in reducing leverage. A full loss of the commercial paper investment would effectively offset about one-third of the cash raised through Oi's recent R$8 billion capital increase. To compensate Oi's equity holders for the loss, PT SGPS will reduce its equity stake in the merged entity of PT and Oi by an amount roughly equal to the loss, the agency said.

Moody’s said the review will focus on the prospects for Oi to raise additional cash through asset sales or equity issuance such that it can reduce leverage within a reasonable timeframe. The agency believes that Oi will continue to shed non-core assets and use the proceeds to repay debt.

In addition, the company has the flexibility to raise additional equity capital and/or adjust its dividend policy to, at least partially, offset the commercial paper loss. Moody's estimates that Oi's leverage will be 4.4 times (Moody's-adjusted) at year-end 2014 and fall to around 4 times by year end 2015.

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