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EXCLUSIVE: Brazil's Oi to start bond talks this week, sources say

Oi will start talks to restructure $14.3 billion of bonds as early as Monday, sources familiar with the situation said, pitting some of the world's biggest investors against each other as Brazil's most-indebted phone carrier fights for its survival.

According to a first source, Oi and adviser PJT Partners Inc will sit down with a group of about 25 bondholders including Pacific Investment Management Co, BlackRock and Citadel. Moelis & Co is advising the group, which may sign non-disclosure agreements to enter talks and have access to the restructuring proposal, the source added.

Oi wants to negotiate with bondholders who "care about the company's future," said a second source, who requested anonymity to speak freely about the plan.

BRAZIL OI BANK OF CHINA
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The decision to kick off talks with the Moelis-advised group leaves unclear how, or whether, Oi will negotiate with other creditors such as hedge funds that have bought credit default swaps linked to Oi's bonds.

Oi's restructuring would be Latin America's second-biggest ever, behind a $15 billion debt overhaul by Mexican cement maker Cemex SAB in 2009, data compiled by Thomson Reuters showed. The Oi deal would also dwarf the $5.2 billion restructuring of former billionaire Eike Batista's OGX Petróleo e Gás SA two years ago, heretofore the largest such deal in the country.

At stake is the fate of Oi, the byproduct of a state-sponsored merger eight years ago and the only Brazilian carrier controlled by domestic capital.

Some shareholders see a restructuring facilitating a potential takeover of Oi, which they say could help narrow the gap with rivals controlled by Spain's Telefónica and Mexican billionaire Carlos Slim's América Móvil.

"Different investors could embrace different strategies, making this situation like a four-player chess game in which you won't understand anybody's strategy until the very last minute," said Paolo Gorgó, an Italy-based investor who analyzes distressed debt and turnaround cases for several newsletters.

Both Oi and New York-based PJT declined to comment on the process. Oi hired PJT in February to oversee the restructuring.

Unsustainable

A disparate base of creditors, the multiple currencies of issuance and a complex debt structure in which liabilities from several units are consolidated at the holding company level may make a quick resolution hard, said Francisco Velasco, a fixed-income analyst with Exotix Partners.

With the widespread notion that Oi's equity is worthless, debt holders may seek to thwart any deal aiming to protect shareholders, analysts at Nomura International and Jefferies recently said.

Negotiations "will not be easy as there is the potential for high inter-creditor conflict, with different types of creditors looking to make the most for themselves, for which the process could be extended in time," he said in an interview.

At 54.9 billion reais ($15.4 billion), Oi's gross debt looks unsustainable at this point, with almost half of it maturing by the end of 2017. Debt-servicing also poses a challenge for Oi, whose debt is 75 percent denominated in currencies other than the Brazilian real, which fell 16 percent against the U.S. dollar over the past two years.

Oi has almost 200 different bondholders spanning from Brazil and the United States to Switzerland and Chile. About ten bond firms who did not join the Moelis-advised group have hired Houlihan Lokey to form their own, a source familiar with the matter told Reuters last week.

Credit default swaps

Creditors whose positions in credit swaps surpass their bondholdings by a large margin have an incentive to disrupt talks or trigger events that could force Oi into a default, Gorgó and other analysts said.

According to the sources, the amount of net notional positions on Oi's CDS is around $1 billion. Some creditors identified billionaire Paul Singer's Elliot Management Corp, the fund that recently won a $4.7 billion, 13-year defaulted debt battle with Argentina, as one buyer of Oi's CDS.

A spokesman for New York-based Elliot declined to comment.


Bloomberg News, citing unnamed sources, reported last week that Oi feared that some bondholders who bought CDS were trying to push it into default. The company's lawyers were looking for ways to offset the actions of those investors, the report said.

Other elements could also turn negotiations even more protracted, bondholders and analysts said.

Brazil's harshest recession in a century, and a political crisis that has delayed a long-sought overhaul in industry rules that could eventually favor Oi, may discourage bondholders from giving the company further breathing room.

The revamped laws could significantly reduce Oi's mandatory capital spending in fixed-line telephony. Oi, Brazil's No. 4 wireless phone carrier, also has the largest fixed-line network that loses money on a regular basis.