S&P Cuts Oi S.A. (OIBR) to 'BB+'; Outlook Stable (PT)

Standard & Poor's Ratings Services lowered its corporate credit and debt ratings on Oi S.A. (NYSE: OIBR) to 'BB+' from 'BBB-' on global scale and to 'brAA+' from 'brAAA' on national scale, and removed them from CreditWatch with negative implications, where they were placed on July 4, 2014. The outlook on the corporate credit ratings is stable.

We also lowered the issue-level ratings on Portugal Telecom International Finance (PTIF) to 'BB+' from 'BBB-', in line with the downgrade of Oi, which provides a senior unconditional guarantee to PTIF bonds.

The downgrade reflects the somewhat weaker credit metrics than we previously expected in our base-case scenario, following the nonpayment of the €897 million commercial paper from Rio Forte Investments S.A. (Rio Forte) held by Portugal Telecom (NYSE: PT), Oi's subsidiary. We incorporated this amount in our previous forecast as part of PT's cash position that would be used to prepay debt on the merger between Oi and PT. As a result, we now expect a lower debt reduction at Oi, pressuring its credit metrics, which were already tight for the 'BBB-' ratings. Prior to the CreditWatch placement, the outlook on Oi was negative, given that our expectations of debt reduction were contingent on certain actions. This event will delay Oi from achieving stronger credit metrics.

We also revised our management and governance (M&G) assessment on the company to "fair" from "satisfactory" based on our view that PT's investment in Rio Forte wasn't clearly communicated, indicating a deficiency in internal controls and corporate governance. The M&G score revision by itself didn't result in the downgrade, but weighed on our view of a "negative" comparable ratings analysis. Following the memorandum of understanding between Oi and PT, through which PT's current shareholders will hold the commercial paper in exchange for an amount of shares to be held at Oi's treasury, we now assume the completion of the merger can be somewhat delayed, but still completed during this year.

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