Moody’s drops Oi, Portugal Telecom, debt

Moody's America Latina said it downgraded Oi SA's corporate family rating to Ba3/A3.br and the ratings on its unsecured debt to B1/Baa3.br, one notch below the corporate family rating due to their junior position in the capital structure.

The company has significant debt at subsidiary holding companies, which have a priority claim on the majority of operating cash flows.

The outlook remains negative.

Moody's Investors Service also Portugal Telecom International Finance, BV’s downgraded unsecured debt to B1, one notch below the corporate family rating. It believes that these notes are pari passu to unsecured debt at to the parent and guarantor, Oi.

In addition, the agency downgraded three specific note issuances at Oi that benefit from a subsidiary guarantee from Telemar Norte Leste SA to Ba3. These three issuances, the 5˝% dollar-denominated notes due 2020, the 9˝% dollar-denominated notes due 2019 and the 5 1/8% euro-denominated 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.

Moody’s said the downgrade was based on the company's persistently increasing leverage and cash consumption, reducing financial flexibility and leading to credit metrics that no longer commensurate with a Ba1 rating.

The agency believes that 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, Moody’s said.

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