Fitch Puts Oi and Portugal Telecom on Ratings Watch Ahead of Merger
Published on: 26th Feb 2014
By: Ian Mansfield
Fitch Ratings has put both Brazil's Oi and Portugal's Portugal Telecom on watch for a possible debt ratings downgrade ahead of their planned merger.
Fitch says that financial pressures were evident in 2013 results from both companies, while Oi's Brazilian operations are in the midst of a turn-around, which is taking longer to deliver and requiring heightened levels of investment.
Portugal Telecom's domestic EBITDA declined by 9.1% in 2013, while Oi's underlying EBITDA was down 7.6% and leverage (net debt to EBITDA) was 4.0x at year end. Pro-forma leverage of the post- merger group, estimated by Fitch at around 3.8x, with the absence of any material free cash flow, in Fitch's view, is unlikely to allow the company to deleverage for some time.
Assuming outstanding regulatory approvals and other conditions to the merger are met, significant pressure is likely to remain on the merged entity's financial performance over the medium term, increasing the likelihood that ratings for the combined entity may be lower than the current 'BBB-' rating.
Pro-forma 2013 revenues and EBITDA of the combined entity were BRL37.8bn and BRL11.3bn, of which approximately 67% of EBITDA originates from Brazil.