The debts of Oi Telecom amount to 65bn BRL.
oi telecom crony capitalism

Oi Telecom: debts of 65bn BRL

On June 20, 2016, Brazil’s fourth-biggest telecom firm, Oi, filed for court-supervised reorganization. According to Brazilian law, it means that the firm is one step away from bankruptcy and is not able to pay back its 65 billion BRL in debts. Now, Oi will present its creditors with a fifth debt renegotiation plan hoping to save what’s left of the company.

Oi’s proposal includes reducing the financial debt by 50 percent, giving bondholders up to 75 percent of the company’s shares. Last Wednesday, when the terms of the plan were first leaked to the press, Oi’s common shares crashed by 23 percent, as the debt renegotiation plan would severely dilute equity.

But why should you care if a company that was so poorly administrated went bankrupt? Well, because Brazil’s three biggest public banks are shareholders of the company – which puts them on the hook as well. If the company goes under, then the damages would be monstrous. Not to mention the impact to its 70 million customers. The company’s administration is absolutely lost, having already gone through 10 different CEOs and a split board of directors.

“National champions”

Oi is just one of the unsuccessful projects that were part of former President Luiz Inácio Lula da Silva’s effort to build so-called “national champions,” which were meant to be huge Brazilian companies able to push the country’s economy forward. Lula and his successor, Dilma Rousseff, used Brazil’s National Development Bank to pour billions into private business. The investment would create “super companies” that would, in theory, become global players and put Brazil on the map of competitiveness.</p> <p>That which was supposed to be a way out of the 2008 international economic crisis, turned out to be little more than a textbook example of crony capitalism.</p> <p>To finance that megalomaniacal dream, the National Treasury transferred over 500 billion BRL to BNDES between 2008 and 2013. While the government was paying interest rates of 14 percent, it was lending to already established companies at rates no higher than 6 percent. Nevertheless, the criteria to choose who would get these great deals were never clear, and helped to create oligopolies in Brazil.</p> <p>Alongside Oi, the most notorious “national champions” were the JBS meatpacking group (whose owners are in jail for manipulating financial markets) and the EBX mining group (whose owner was arrested for corruption). Not exactly a list of success stories. And we’re not even mentioning some of Petrobras’ equipment suppliers, which were created (and financed by public banks) with the sole purpose of siphoning public money.</p> <p>In 2016, the economist Sérgio Lazzarini <a href="https://www.nexojornal.com.br/expresso/2016/07/04/Como-empresas-apoiadas-para-virar-campe%C3%A3s-nacionais-quebraram-ou-entraram-na-mira-da-Lava-Jato">analyzed</a> the national champions strategy and called it a “fiasco.” He claimed that the Brazilian strategy lacked the main requirements to create global players through public investments: (1) choose companies with human capital and expertise that allow them to set themselves apart from the competition; (2) insert the companies on global value chains; and (3) demand results.</p> <h3>Oi Telecom, a story of controversy</h3> <p>Oi was formed in 2008, after the fusion of Telemar – a company linked to Eduardo Cunha, the corrupt suspended Speaker of the House – and Brasil Telecom – a company formerly owned by a banker accused of <a href="https://brazilian.report/2017/10/17/corruption-transparency-international/">corruption</a>. Back in 1998, when <a href="https://brazilian.report/2017/10/18/brazils-recession-state-finances/">telecom privatization</a> began, Telemar was called “Telegang” by then-Minister of Communications Luiz Carlos Mendonça de Barros.</p> <p>Later, Oi Telecom was included in the “national champions” plan. To form a “super telecom,” the government gave Telemar credit to take over Brasil Telecom, thus becoming Brazil’s second largest private company at the time. Only after the megalomaniacal euphoria had passed did it become public that the newly formed Oi had acquired $714 million in debts.</p> <p>In October 2013, Oi announced a merger with Portugal Telecom – a deal blessed by José Dirceu, the disgraced former Chief of Staff to Lula, who was convicted multiple times of corruption.</p> <p>Over the past few years, the company has had the dubious honor of being the “champion of customer complaints.” It is more than an embarrassing title, as Oi spends more than $142 million per year in legal fees, mostly in battles with disgruntled customers.</p> <h3>What happens now to Oi Telecom?</h3> <p>Should the new debt renegotiation plan be approved, Oi’s bondholders – to whom the company owe 49 billion BRL, will have to pardon 50 percent of the debt. In exchange, they will have up to 75 percent of the company’s stake. Meanwhile, the current stakeholders would have only 25 percent of the company. The plan also includes a 4 billion BRL capitalization.</p> <p>Oi’s debts to Brazil’s telecom regulator Anatel (14 billion BRL) would be paid in installments over 20 years – but the payments would start within four years.</p> <p>The plan would also raise investments from roughly 5 billion BRL every year to 7 billion BRL. Oi has been the company with fewer investments when compared to Brazil’s other big telecoms.

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MoneyDec 19, 2017

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