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Moody's says Oi's tower sale is credit positive, but does not improve its rating

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Note -- this news article is more than a year old.

The agreement between Brazil's Oi's and SBA Communications to sell 1,641 tower sites in Brazil for BRL1.2 billion is credit positive as it will help the company continue to reduce debt, according to Moody's Investors Service.

Assuming Oi uses 100% of the sale proceeds for debt repayment, the net reduction in adjusted debt will be approximately BRL800 million after Moody's standard operating lease adjustment.

On its own, the tower sale is a small transaction but one that reflects management's commitment to deleveraging through asset monetization. Moody's believes that Oi will continue to shed non-core assets and use the proceeds to reduce leverage. Moody's estimates that Oi's leverage will be 4.2x (Moody's adjusted) at year end 2014 and fall to around 4x by year end 2015.

Moody's has previously warned that Oi's leverage remains high for its Baa3 rating. The negative outlook reflects the risk that the company may not be able improve EBITDA such that leverage is on a trajectory to fall towards 3.5x (Moody's adjusted) while Oi transitions to sustainable, positive free cash flow. Moody's believes that Oi's full year 2014 results will be instructive as to the company's progress towards these goals, as the 2014 financial results will reflect two to three quarters of the integrated entity (PT + Oi) and allow for a true measurement of progress.

Moody's could downgrade Oi's ratings following overall negative revenue growth or a decline in the company's market share and margins as a result of a stronger competitive market, or weaker than expected operating performance in Portugal and/or Africa. Specifically, Oi's rating could come under downward pressure if adjusted total debt/EBITDA goes above 4.2x for an extended period of time, or if the company's free cash flow remains negative beyond the end of 2015.

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