(Adds details of Moelis statement in 12th paragraph)
By Ana Mano
SAO PAULO, July 25 (Reuters) - Aurelius Capital Management LP has contacted bondholders in Oi SA’s Netherlands-based units to challenge the basis of a prior restructuring accord that substantially lowered the recovery value of their bonds, seeking to gain clout in Brazil’s biggest-ever bankruptcy reorganization.
New York-based Aurelius, a distressed debt investment firm that owns bonds issued by Oi SA subsidiaries Portugal Telecom International Finance BV and Oi Brasil Holdings Coöperatief UA, began distributing a letter explaining its strategy to fellow bondholders on Friday.
In the letter, Aurelius challenges the notion spread during restructuring talks between Oi and a group of investors advised by Moelis & Co that bonds backed by the Telemar Norte Leste SA unit rank first in repayment order in relation to those sold by Oi Brasil Holdings and Portugal Telecom International.
Aurelius argues that the Netherlands-based subsidiaries had their cash stash sent to Telemar Norte and other Brazil-based units of Oi SA in the form of loans in the three months prior to the latter’s bankruptcy protection petition. Assuming that those loans do not enjoy credit support from Oi SA - as the Moelis-led group did during prior talks, is wrong, the letter said.
Both Rio de Janeiro-based Oi and Aurelius declined to comment. In a statement on Monday, the Moelis-led group said the Aurelius letter is based on “incomplete and erroneous information” about Brazilian laws.
The authenticity of the letter was confirmed by a source with direct knowledge of Aurelius’ strategy.
The situation draws the battle lines forming ahead of negotiations between Oi, creditors and the court overseeing Brazil’s largest-ever bankruptcy, with 65 billion reais ($20 billion) of liabilities. Disagreements among creditors are fanning uncertainty about bond recovery values because of the unsecured nature of most securities.
According to one investor who received the Aurelius letter, before Oi SA’s June 20 bankruptcy filing, Telemar Norte-backed notes traded 10 cents on the dollar wider to non Telemar-backed notes. The price difference, however, has narrowed by half in recent weeks - a sign more bondholders might be buying Aurelius’ arguments, the investor said.
The value of outstanding notes sold by the two Oi finance subsidiaries in the Netherlands is about 24 billion reais ($7.4 billion), compared with the 9.5 billion reais worth of Telemar Norte-backed debt, Aurelius claims.
Oi succumbed to a heavy debt burden and mounting competition after years of shareholder disputes. The disputes continue to cloud the reorganization efforts of the company, as a new minority shareholder, Société Mondiale, is demanding changes in Oi’s board of directors.
Under terms of the Moelis-led restructuring proposal, which began in April and collapsed a few days before Oi’s bankruptcy filing, holders of Telemar Norte Leste-guaranteed bonds would get a 50 percent rate of recovery on their investment, compared with 17.5 percent for holders of the other debt.
In Monday’s statement, the Moelis-led group claimed to have 40 percent of Oi’s bonds, representing about $4 billion in face value of the notes. The group is expanding, Moelis says, and currently has 70 investors based in Europe, Asia, the Americas and the Middle East.
Prior to the bankruptcy filing, the Moelis-led proposal would give existing bondholders of Oi 95 percent of the company, a plan that irked some major shareholders in Brazil’s largest fixed-telephone operator.
Even before Aurelius sent its letter on Friday, another group of holders of non-Telemar Norte bonds began to devise a negotiation strategy.
Reuters reported on June 23 that New York-based investment bank Houlihan Lokey Inc and Metrica Investments LLC have stepped up talks with owners of Oi Brasil and Portugal Telecom International bonds.
$1 = 3.2879 Brazilian reais Writing by Guillermo Parra-Bernal; Editing by Dan Grebler and Alan Crosby