Fitch Ratings has downgraded Oi S.A.'s Long-Term Local and Foreign Currency Issuer Default Ratings (IDRs) to 'C' from 'CC'.

In addition, Fitch has downgraded Oi's unsecured senior notes due 2025 and senior secured 2026 notes to 'C'/'RR4' from 'CC'/'RR4'. The National Long-Term Rating was downgraded to 'C(bra)' from 'CC(bra)'.

The downgrades follow Oi's announcement that it has obtained an injunction from Rio de Janeiro's court establishing, among other protection measures, the suspension of enforceability of all obligations related to financial instruments, such as debt principal and interest. The ratings will be downgraded to 'RD' if in Fitch's opinion Oi experiences an uncured payment default in its 2025 notes. Oi's ratings will be downgraded to 'D' if the company files for bankruptcy protection.

Key Rating Drivers

Standstill Obtained: The injunction allows Oi to suspend the enforceability of obligations for the next 30 days, mainly the coupon payment of the 2025 notes due February 5 and pension fund obligations. The objective of the injunction petition was to preserve cash, avoid acceleration of its debt, protect assets and ensure the continuity of operations. Fitch considers this event a standstill as Oi's payment capacity is irrevocably impaired.

Unsustainable Leverage: The company's EBITDA will continue to be significantly pressured by a heavy cost structure due to concession payments of its fixed telephony business as well as by liabilities of its legacy operations. Oi's LTM EBITDA as of Sept. 30, 2022 was BRL517 million which compares with BRL35 billion of debt at face value. In addition, Oi needs to invest BRL1.0 billion to BRL1.2 billion of capex per year over the next two years to sustain its plans to expand its broadband services strategy while it migrates its customers to fiber-optic solutions from copper.

Weak Liquidity: Oi's liquidity is weak. The company is projected to generate negative FCF during the rating horizon due to interest payments of around BRL1.8 billion and capex in the range of BRL1 billion to BRL1.2 billion. Oi has high debt of BRL35 billion at face value and a weak interest coverage meaningfully below 1.0x despite grace periods in part of this debt. The company had a cash balance of approximately BRL3.0 billion at the end of 2022. The company faces financial debt maturities of BRL400 million in 2023 and BRL800 million in 2024.

Derivation Summary

The current IDRs incorporate Oi's standstill situation and will likely enter a debt restructuring with creditors.

Key Assumptions

Fitch's estimate of recovery is based on a going concern EBITDA of BRL1.2 billion-BRL1.5 billion, which is considered achievable in the medium term. Fitch uses a multiple of 4x, which is in the low end of the range of telecom multiples and reflects the heavy competition in Brazil's fixed broadband market.

Fitch estimates the value of Oi's stake in the V.tal at approximately BRL7.0 billion. Based on these assumptions, the forecast recovery rate for Oi is consistent with an 'RR4'.

RATING SENSITIVITIES

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

A ratings upgrade is considered unlikely prior to a debt restructuring.

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

An uncured payment default on financial obligations after injunction relief period or the formal announcement of a distressed debt exchange would lead to a downgrade to 'RD';

A filing for bankruptcy protection would lead to a downgrade to 'D'

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.

Issuer Profile

Oi owns copper telecommunications infrastructure and provides fiber optic and other digital services for residential and corporate customers.

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. Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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