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Rating Action:

Moody's places Portugal Telecom International Finance B.V.'s ratings under review for downgrade

Global Credit Research - 18 Jul 2014

Madrid, July 18, 2014 -- Moody's Investors Service placed the bond and program ratings of Portugal Telecom International Finance B.V. (PTIF) on review for downgrade. The rating review was triggered by the review of the ratings of Oi S.A. (Oi), which is the 100% owner and full and unconditional guarantor of PT Portugal SGPS, S.A. and its subsidiary Portugal Telecom International Finance B.V.

Please refer to Oi's PR: https://www.moodys.com/research/PR_304352

PTIF is the financing conduit 100% owned by PT Portugal SGPS, S.A. Both entities are fully guaranteed by Oi S.A. The rating of PTIF is linked to Oi´s rating by virtue of the guarantee in place. Any rating action on Oi implies a rating action on PTIF, as long as the guarantee is in place.

The review was prompted by the disclosure of a potential loss of up to EUR 900 million from commercial paper (CP) investments made by Portugal Telecom SGPS S.A. (PT SGPS) which were contributed as part of Oi's capital increase in May of 2014, within the merger process between Oi and PT SGPS. The loss will reduce the consolidated entity's liquidity and could substantially delay Oi's progress in reducing leverage. A full loss of the CP investment would effectively offset approximately one-third of the cash raised through Oi's recent Brazilian R$8 billion capital increase. To compensate Oi's equity holders for the loss, PT SGPS will reduce its equity stake in the merged entity of PT and Oi by an amount approximately equal to the loss.

"We don´t expect the changed terms of the merger between Oi and PT SGPS to affect in any way the guarantee from Oi towards PTIF's bondholders. Also, the liquidity at PTIF remains adequate to cover any cash needs through December 2015, even after the default of Rio Forte Investments SA´s CP" says Moody´s analyst Carlos Winzer.

RATINGS RATIONALE

The ratings review will focus on Oi´s prospects to raise additional cash through asset sales or equity issuance such that it can reduce leverage within a reasonable timeframe. Moody's believes that Oi will continue to shed non-core assets and use the proceeds to repay debt. In addition, the company has the flexibility to raise additional equity capital and/or adjust its dividend policy to, at least partially, offset the CP loss. Moody's estimates that Oi's leverage will be 4.4x (Moody's adjusted) at year end 2014 and fall to around 4x by year end 2015.

As mentioned in previous Moody's publications, Oi's leverage remains high for its Baa3 rating. To maintain the Baa3 rating, Oi must improve EBITDA and/or reduce debt such that leverage is on a trajectory to fall towards 3.5x (Moody's adjusted), while transitioning to sustainable, positive free cash flow. Moody's is likely to conclude the review of Oi's ratings when the company's 2014 combined results are more evident.

Moody's would downgrade PTIF´s ratings following a downgrade of Oi's ratings. This might occur if Oi´s revenues remain weak, if margins deteriorate or if market share declines as a result of a stronger competitive market or weaker than expected operating performance in Portugal and/or Africa. Specifically, Oi's rating could be downgraded if adjusted total debt/EBITDA is not on track to fall below 4.2x or if the company's free cash flow remains negative beyond the end of 2015.

The principal methodology used in this rating was the Global Telecommunications Industry published in December 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Portugal Telecom International Finance B.V. is the financing conduit 100% owned by PT Portugal SGPS, S.A. Domiciled in Lisbon, PT Portugal SGPS, S.A. is the leading telecommunications operator in Portugal, servicing 2.5 million fixed lines and 1.3 million ADSL retail connections. In addition, the operator had approximately 7.9 million mobile phone customers in Portugal as of March 2014. The company's annual revenues amounted to EUR2.9 billion and reported EBITDA to EUR1.2 billion for the 12-month period to March 2014. Both entities are fully guaranteed by Oi S.A.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Carlos Winzer
Senior Vice President
Corporate Finance Group
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Michael J Mulvaney
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's places Portugal Telecom International Finance B.V.'s ratings under review for downgrade
No Related Data.

 

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