Moody's Downgrades Oi S.A. (OIBR) to 'C' Amid Judicial Recovery Filing

Moody's Investors Service, ("Moody's") downgraded the ratings on the notes issued by Oi S.A. (NYSE: OIBR) and guaranteed by Telemar Norte Leste S.A. ("Telemar") and the unsecured debt at Oi S.A. to C.

At the same time Moody's America Latina downgraded Oi's corporate family ratings ("CFR") to C/C.br. As part of this rating action, Moody's also downgraded the ratings on unsecured debt at Oi to C/C.br.

Moody's Investors Service also downgraded the unsecured debt at Portugal Telecom International Finance, BV ("PTIF") and Oi Brasil Holdings Cooperatief U.A. to C. Moody's believes that these notes are pari passu to unsecured debt at to the parent and guarantor, Oi.

Moody's Investors Service also downgraded three specific note issuances at Oi to which benefit from a subsidiary guarantee from Telemar by two notches to C. These three issuances, the 5.5% USD notes due 2020, the 9.5% USD notes due 2019, and the 5.125% EUR notes due 2017 were originally issued by Telemar but transferred to Oi. Moody's believes that the Telemar guarantee is sufficient to differentiate the creditworthiness of these issuances versus other unsecured obligations of Oi, but we estimate losses on these instruments to be also associated with a C rating, preventing further differentiation on the ratings scale.

RATINGS RATIONALE

Ratings downgraded:

Issuer: Oi S.A.

- EUR 601 mm GLOBAL BONDS due 2017: to C from Caa1

- USD 142 mm GLOBAL BONDS due 2019: to C from Caa1

- USD 1,787 mm GLOBAL BONDS due 2020: to C from Caa1

- BRL 1,100 mm GLOBAL BONDS due 2016: to C from Caa2

- USD 1,500 mm GLOBAL NOTES due 2022: to C from Caa2

Issuer: Portugal Telecom International Finance B.V.

- BACKED Senior Unsecured MTN: to (P) C from (P) Caa2

- EUR 250 mm GTD EURO MTNS due 2017: to C from Caa2

- EUR 382 mm GTD GLOBAL MTNS due 2017: to C from Caa2

- EUR 750 mm GTD EURO MTNS due 2018: to C from Caa2

- EUR 50 mm GTD FLT RT EURO MTNS due 2019: to C from Caa2

- EUR 750 mm GTD EURO MTNS due 2019: to C from Caa2

- EUR 1,000 mm GTD EURO MTNS due 2020: to C from Caa2

- EUR 500 mm GTD EURO MTNS due 2025: to C from Caa2

Issuer: Oi Brasil Holdings Cooperatief U.A.

- EUR 600 mm GTD GLOBAL BONDS due 2021: to C from Caa2

The downgrade follows Oi´s filing for judicial recovery, the closest equivalent to chapter 11 in Brazil.

The recovery filing contains BRL 65.4 billion (~USD 19 bn) in liabilities including BRL 51 billion in financial debt of which BRL 31.6 billion held by bondholders. Banco Nacional de Desenvolvimento Economico e Social - BNDES (Ba2 negative), Caixa Economica Federal (Ba2 negative) and Banco do Brasil S.A. ((P) Ba2 negative) are creditors to around BRL 13 billion, BNDES loans are secured with 60% of the company's receivables that totaled BRL 8.6 billion in the end of March 2016. The voluntary bankruptcy filing was triggered after no agreement was reached with bondholders in a negotiation that involved haircuts of up to 75% over the instruments' face value.

The judicial recovery request results from the company's persistently increasing leverage and cash consumption, which has reduced financial flexibility and has led to an untenable capital structure. There is no visibility of other options of transforming events such as a merger or capital injection that could lead to lower leverage, or a new debt issuance that would result in a more comfortable maturity profile, and stronger financial flexibility to avoid a default. Oi had BRL 8.5 billion in cash at the end of March 2016 and upcoming maturities in the order of BRL 8.3 billion until the end of 2016, BRL 8.8 billion in 2017, and BRL 6.8 billion in 2018. CAPEX is high at around BRL 5.0 billion per year and the company is not expected to generate positive free cash flow at least until 2018, reinforcing its dependency on the capital markets, currently closed, to extend debt maturities.

Subsequent to today's actions, all Oi's ratings will be withdrawn shortly following the filling for the restructuring proceeding. Please refer to Moody's withdrawal policy on moodys.com.

The judicial recovery request needs to be ratified by shareholders on an extraordinary shareholders' meeting on July 22 and then approved by the court. Following the court decision authorizing the filing, the company has 60 days to present the recovery plan, that, if approved by the general meeting of creditors, will bind all of the company's creditors that are subject to the recovery proceeding. Some claims are not part of the recovery process, including credits subject to fiduciary alienation, leases, taxes, and Advances on Exchange Contracts (ACC). The filing of a recovery leads to an automatic stay period of 180 days, when all enforcement actions and executions against the debtor are automatically suspended.

For the purpose of voting in reorganizations, creditors will be divided into three broad classes: (i) Labor credits; (ii) Secured credits; and (iii) Privileged, unsecured and subordinated credits. All three classes must approve the recovery plan. In class (1) the plan should be approved by the majority of members while in classes (2) and (3), the plan may be approved by at least 50% of total claim amount and simple majority of members. Secured creditors vote in class (2) up to the value of the collateral and with class (3) for the deficient portion.

Oi's C corporate family rating reflects its untenable capital structure, very limited financial flexibility given its large debt burden and challenging momentum for funding through capital markets. In our view the judicial recovery proceeding will lead to severe losses to creditors, associated with a C rating.

On the operational side, despite the company's cost cutting and efficiency efforts, its business will face further margin deterioration from an unfavorable product mix shift to pay TV and broadband and the price pressure inherent in its targeted value segment, especially during the ongoing economic slowdown in Brazil. Further reductions in capital spending may result in future operational and competitive challenges.

In our view, it is also inevitable to expect some level of business disruption following the filling for judicial recovery, such as client losses, issues in the negotiation with suppliers, and employee turnover. All those factors will put additional pressure on the company´s operating performance.

The principal methodology used in these ratings was Global Telecommunications Industry published in December 2010. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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