Exclusive: Brazil's Oi readies plan to repay small creditors first, sources say

By Guillermo Parra-Bernal and Ana Mano

SAO PAULO (Reuters) - Oi SA is working on a plan by which small-sized suppliers and contractors would be repaid before banks and bondholders, as Brazil's biggest fixed-line phone carrier seeks to garner support from thousands of creditors to emerge faster from creditor protection, two people familiar with the matter said.

According to the people, the plan could be presented to members of the so-called Classes 1, 3 and 4 of creditors as early as next week. About 95 percent of Oi's almost 67,000 creditors are included in those classes, which encompass employees, plaintiffs in court cases and small contractors.

While the amount owed to the targeted members of the three classes is slightly over 1.2 billion reais ($371 million), Chief Executive Officer Marco Schroeder and the majority of Oi's board believe settling those debts first would help speed up passage of the creditor protection plan, the people said. The plan must be presented first to Oi's bankruptcy judge and prosecutors.

The initiative underscores Schroeder's efforts to untangle a protracted reorganization plan that has met fierce resistance from financial creditors and revealed shareholder rifts. At stake is the recovery of a carrier that employs some 140,000 people and is the only phone company operating in about one-third of the nation's 5,500 municipalities.

Rio de Janeiro-based Oi, which filed for bankruptcy protection in June after talks to restructure 65.4 billion reais in debt collapsed, declined to comment. The media offices of Oi's two biggest shareholders, Pharol SGPS SA and investment firm FIA Société Mondiale, also declined to comment.

The people spoke under the condition of anonymity because the plan remains private.

Oi's legal advisers are currently assessing whether it would be legal to repay some or all of the money owed to smaller creditors in the three creditor classes before the reorganization plan is fully approved, the people said.

REPLACEMENT FOR PJT?

By negotiating early with smaller creditors who are struggling with Oi's bankruptcy protection, management is signaling that the tussle with banks and bondholders will take longer, said one of the people. If passed, the plan would help shave off the equivalent of 1.5 percent of Oi's total debt.

Once the plan for small creditors is formally presented to them, Oi's board and management will decide how to negotiate with financial creditors, the people said.

The first step would be deciding whether Oi will hire a replacement for PJT Partners Inc (NYSE: PJT) as the company's adviser in the renegotiation of over 34 billion reais in financial liabilities. Reuters reported on Sept. 30 that PJT would step down over how the negotiations with bond investors were being conducted.

According to one of the sources, there is a list of potential replacements to PJT, although Schroeder and part of the board want a Brazil-based firm with deep knowledge of the country's bankruptcy proceedings to undertake the task. Société Mondiale is against hiring an external adviser to negotiate with bondholders, a third person said.

The list of prospective substitutes for PJT includes G5 Evercore, a São Paulo-based investment banking firm that is 47 percent-owned by Evercore Partners Inc (NYSE: EVR); Alvarez & Marsal Holdings LLC, and a consortium formed by local turnaround consultancy firm Integra Associados and New York-based investment bank Abadi & Co Global Markets Inc, said the same person.

($1 = 3.2353 reais)

(Editing by Phil Berlowitz)

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