Fitch Ratings has affirmed all of Oi S.A.'s ratings, including the Long-Term (LT) Foreign Currency (FC) Issuer Default Rating (IDR) at 'CCC+', the LT Local Currency (LC) IDR at 'CCC+', the USD unsecured 2025 notes at 'CCC+'/'RR4', and the National LT Rating at 'B(bra)'/Stable.

Fitch also affirmed the USD secured 2026 notes of Oi Movel S.A. at 'CCC+'/'RR4'.

Oi's ratings reflect weak cash flow prospects once the company executes its divestment plan as well as the limited expected dividends over the next few years from Oi's proforma 42% stake in V.tal. Fitch projects net leverage will be well above 10x on a pro forma basis with the divestments. Positively, asset sales have progressed, which has increased certainty of a liquidity boost in the near term. If divestment proceeds of BRL26 billion are not used to reduce debt by more than BRL15 billion and Oi's remaining business (New Oi) continues to show revenue trends below expectations, a 1-2 notch downgrade would occur.

Key Rating Drivers

Asset Sales: Oi is in the process of completing the sale of its mobile unit for BRL15.8 billion to a consortium of the three other mobile network owners in Brazil, as well as a 51% stake in its fiber optic infrastructure assets (now rebranded as V.tal) for BRL10.6 billion to BTG Group. After the completion of the transaction, which will also include the merger of subsea fiber optic assets and a contribution by the buyer of BRL1.5 billion, Oi will own 42% of V.tal.

Debt Prepayments: The net proceeds of the mobile sale and to a lesser extent the proceeds from the sale in the stake of V.tal will be used to pay down both pre-petition and post-petition liabilities. Oi is expected to use part of net sales proceeds of BRL24 billion to reduce the BRL 4.6 billion secured development bank loan, the USD880 million 2026 notes, the BRL 2.3 billion bridge private debenture. In addition, it will pay BRL3 billion in non-consolidated convertible debt at V.tal and is expected to pay BRL3.3 billion of bank and ECA debt

Partial Divestment of Fiber Infrastructure: The main objectives behind the sale of Oi's stake in V.tal are to enhance Oi's financial flexibility while allowing V.tal to continue to expand its fiber optic network. After the V.tal transaction is concluded V.tal will cease to be jointly and severally liable with the debtors for their payment obligations as per the amendments to the judicial reorganization plan.

The remaining Oi group (New Oi) will house the legacy copper infrastructure and will focus on providing fiber optic and other digital services for its residential, commercial and customers through V.tal's network. The company will maintain other assets such as call center and technical & logistics services, in addition to most of the debt.

Fiber Strategy: There has been a sharp increase in the demand for high-speed internet in Brazil, which has coincided with significant investments by Oi's competitors. Oi has invested close to BRL15 billion over the last two years, primarily on deploying its FTTH network, passing about 13.5 million homes and connecting 3.2 million of them of as of Sept. 30, 2021. These figures compare with 7.8 million homes passed and 1.7 million homes connected the same period of last year.

V.tal will also offer fiber to other telecoms. A neutral infrastructure provider can aggregate wholesale telecom demand, providing a cost-effective solution to carriers seeking to expand network coverage and capacity. As carriers plan for 5G deployment, V.tal also hopes to capitalize on increased demand for fiber to the tower (FTTT).

Weak Financial Profile: New Oi's leverage and coverage metrics will be remain weak after the completion of the asset sales. Fitch anticipates that V.tal will have superior growth characteristics relative to New Oi. However, Fitch does not expect V.tal to pay dividends until 2024 at the earliest. The low growth potential of New Oi and the deconsolidation of V.tal contribute to the overall weak assessment of Oi's credit profile despite the planned reductions in overall debt.

Debt Ratings Capped: Fitch applies a bespoke approach to recovery for issuers rated 'B+' and lower, using the higher of going-concern and liquidation estimates to enterprise valuation. Fitch forecasts recovery rates commensurate with an 'RR1' rating for the secured notes due in 2026, which could potentially cause an uplift of up to three notches (B+/RR1) from Oi's IDR. However, Fitch's 'Country-Specific Treatment of Recovery Ratings Criteria' caps Brazilian issuers at 'RR4', resulting in an instrument rating of 'CCC+', equal to Oi's FC IDR, despite the new secured notes collateral package and seniority.

Derivation Summary

Oi's ratings reflect its restructured financial profile and the still uncertain outlook for its turnaround strategy. Compared to Latin American carriers in the low speculative grade/distressed territory, such as Digicel Group Holdings Limited (CCC/ Positive), Oi has better liquidity. Fitch also expects Oi to carry higher leverage and lower profitability as a result of the divestments of the higher margin assets. Compared to American carriers that have either restructured or declared bankruptcy, such as Windstream and Frontier, Oi has a better business position as the third largest telecom operator in Brazil.

The ratings are not constrained by Brazil's operating environment or country ceiling; however, the company is wholly exposed to fluctuations in the Brazilian macroeconomic environment.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer

New Oi revenues in the BRL9.0 billion - BRL10.0 billion range, along with EBITDA margins of 12%-15%;

Successful mobile and infrastructure transactions for the agreed upon amounts (BRL16.5 billion and BRL10.6 billion);

Proceeds from asset sales are used to pay down debt, according to JRP amendments;

For the recovery analysis, Fitch estimates a going concern EBITDA of around BRL1.4 billion and uses a 4.0x multiple. Most of the enterprise value comes from the 42% stake in V.tal, valued at approximately BRL20.0 billion.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Fitch does not anticipate a positive rating action for Oi in the near term due to the expected high leverage and negative free cash flow.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Failure to repay debt in excess of BRL15 billion;

Weak operating results at New Oi;

Competitive pressures leading to lower than expected revenue and cash flow generation and coverage ratios dropping below 1.0x.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Adequate Liquidity: As of Sept. 30, 2021, New Oi had BRL3.2 billion of cash and equivalents against BRL268 million of short-term debt and forecast interest payments of around BRL1.5 billion.

Oi will launch a tender offer for the 2026 secured notes at par plus 33.33% of the coupon following the sale of the mobile unit. The net proceeds from the mobile sale will be applied to tendered notes. The economic rationale underlying the transaction is to save on interest expense and to reduce refinancing risk.

Fitch expects the gross proceeds from these divestments to be around BRL27.0 billion-BRL28.0 billion, which will be used to prepay debt according to the amended JRP. Fitch expects that secured creditors will be paid first, followed by unsecured creditors in installments.

Issuer Profile

Oi owns copper infrastructure provides fiber optic and other digital services for residential and corporate customers. The company is in the process of selling its mobile operations as well as a stake in V.tal, which is a fiber optic network in Brazil.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Oi S.A. has an ESG Relevance Score of '4' for Financial Transparency. Reporting is adequate, but the complexity of the financial and operational restructuring weighs on the overall assessment of Transparency, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.

RATING ACTIONS

Entity / Debt

Rating

Recovery

Prior

Oi S.A.

LT IDR

CCC+

Affirmed

CCC+

LC LT IDR

CCC+

Affirmed

CCC+

Natl LT

B(bra)

Affirmed

B(bra)

senior secured

LT

CCC+

Affirmed

RR4

CCC+

senior unsecured

LT

CCC+

Affirmed

RR4

CCC+

Oi Movel S.A.

senior secured

LT

CCC+

Affirmed

RR4

CCC+

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Additional information is available on www.fitchratings.com

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