While Oi S.A.’s (Oi) consolidated reorganization plan was approved by its creditors and affirmed by the Restructuring Court on 8 January, the implementation of some of the key restructuring transactions is contingent on resolving the treatment of ANATEL’s claims. With a waiver recently approved by creditors to allow a conversion of the bond debt into equity without any solution on the horizon for the treatment of ANATEL’s claims, the Debtwire legal analyst team examines the situation, highlighting the possible ways to be adopted in an attempt to overcome the matter.
CLICK HERE for the Debtwire legal analyst team’s primer on the Brazilian restructuring system.
Oi filed its Judicial Recovery protection request on 20 June 2016 and, on 8 January 2017, the Restructuring Court affirmed the creditors’ approval of that plan. Among other debt restructuring proposals provided in the plan, Section 18.104.22.168. (“Capital Increase – Capitalization of Credits”) provides for the issuance of new Oi ordinary shares to qualified unsecured bondholders – a capital increase through a debt to equity conversion – which is to be implemented by 31 July 2018. Following the swap, Section 6 of the plan also proposes a capital increase of BRL 4bn through a backstop agreement, expected to be done by 28 February 2019.
But before both the equitization transactions can take place, the plan requires a resolution of the treatment of claims belonging to the National Telecommunications Agency – ANATEL. The telecom agency holds the largest claim listed in Oi’s creditor’s list—BRL 11.1bn out of a total BRL 63.9bn of debt. The debt stems mostly from unpaid fines and penalties. ANATEL voted against Oi’s restructuring plan at the creditor meeting, relying on the arguments that (i) its claims are extraconcursal and therefore it should not be impaired by the Judicial Recovery process; and (ii) the proposal to repayment the debt through installments is not permissible under the law, as discussed below.
According to the plan, the debt-to-equity conversion and the backstopped capital raise can only be implemented if ANATEL stopped pursuing its litigation and appeals over its claim treatment. But if the ANATEL claims litigation remains unresolved, the company has the option to ask for an express waiver from the bondholders to implement the restructuring transactions – a sort of solution not desired either by the company or by the creditors, as all the involved parties are interested in overcoming ANATEL claims’ situation as quickly as possible.
During the last months, the company was optimistic that it would be able to solve the pending issues with the regulator without requesting the bondholders’ waiver, and thus convert the bonds into equity soon. However, in the imminence of the deadline and without any sign that an agreement between the company and the government will be reached, on 11 June the bondholders approved a waiver on the implementation of this precedent condition, in order to allow the company to proceed with equitization. In addition, on 14 June ANATEL released a press statement informing that it approved the capital increase, although it does not mean that the regulator resigned the judicial discussions regarding its claims’ classification. Notably, ANATEL’s claims situation is still pending, as well as a number of appeals filed by the telecom agency to exclude its claims from the in-court restructuring process, and the waiver granted by the bondholders sounds like an evidence that discussions with the regulator are not evolving as quickly as expected.
ANATEL claims classification
As mentioned above, Oi’s approved plan included a restructuring of ANATEL’s debt. Specifically, Section 4.3.4. of the reorganization plan stated the regulator’s claims would be paid over 20 years, with a 25% discount in penalties for its delays in payments and a 50% discount in interest rates. Finally, the plan states a four-year grace period for administrative penalties regarding the concession agreements.
On the other hand, ANATEL argues that the Corporate Court overseeing the Judicial Recovery does not have competence to rule on the rights and issues related to public entities. Rather, these issues, including the amount and impairment of a public entities’ claims, belong in Federal Court, given that public claims are ‘non-negotiable.’ Additionally, the regulator claims that a judicial recovery plan is a debt renegotiation exclusively designed for private creditors, while its claims should follow the extraconcursal route and receive the same treatment of tax claims, considering that unpaid fines are charged through “tax foreclosure processes” (execucoes fiscais). Under Brazilian Reorganization Law, tax claims are considered as extraconcursal and thus not impaired by a Judicial Recovery process.
Relying on these arguments, ANATEL filed several appeals and objections before the Rio de Janeiro State Court and the Superior Courts since Oi requested court protection, neither of which have reached a final decision. In one of these appeals, the State Court rejected ANATEL’s arguments holding that its claims should be submitted by the reorganization process as they are not tax claims, because both the Brazilian Reorganization Law and the National Tax Code restrict the benefit of the non-impairment application to unpaid taxes only. The fact that such fines are charged via the same proceedings does not mean they must be considered tax claims, the court held.
The only decision so far that has been favorable to ANATEL was issued on 19 October, when the State Court granted a preliminary injunction elaborating that fines related to default on payment of tax claims should also be considered as tax claims, and thus excluded from the Judicial Recovery process, as opposed to fines related to default on obligations stated in the concession agreements – however, there is no definition in this preliminary decision regarding the amount of such eventual tax claim. This preliminary injunction will be reformed or affirmed on the definitive ruling on this appeal, and additional rulings on the several other appeals are still pending as well.
ANATEL has yet to succeed in any of its appeals, which may have given bondholders the confidence to issue its recent waiver. Now that the bondholders are the company’s equity holders, any reinstatement of ANATEL’s claim will be their problem.
Should ANATEL push its argument to the end, it might take a long time for all of ANATEL’s current appeals to reach final, non-appealable orders. After two years of fighting, this unpredictability regarding a very expensive issue leads to uncertainties that might make investors think twice before providing the company with new money, putting at risk the completion of the plan and the survival of the company. In the worst-case scenario, if the ANATEL situation is still pending and there is no waiver from the bondholders by the time of the implementation of the second capital increase through the backstop agreement, the deadline of which is 28 February 2019 as mentioned above, then it would be necessary to start it all over again and have a new creditor meeting – a step back that probably nobody would like to take.
Furthermore, a Provisional Measure (Medida Provisoria) has also been considered in the recent past as a feasible way to overcome the matter – the president could enact an order explicitly making ANATEL’s claim impacted by Judicial Recoveries. However, it is unlikely to succeed due to Brazil’s current political and economic situation – in the imminence of a new presidential election, and with the current president’s lack of power before the Congress to request for the approval of such an important issue like this, it is hard to imagine that anything would happen before February 2019.
ANATEL’s bondholders seem to be banking on a favorable order on the regulator’s claims, expected to be paid as stated in the reorganization plan. But should they have placed a losing bet, we could very easily see a new Judicial Recovery process. However, as ANATEL’s claims would be shielded from haircuts in such a scenario, the pain of that claim’s payment would be felt by those creditors presently willing to invest in the post-restructuring Oi.
 Bondholders with claims greater than USD 750,000m.
 Only those bondholders who evidenced their interest in joining the capital increase operation before the plan’s approval were allowed to participate in the backstop agreement, leading to several appeals of remaining bondholders. Click here for the Debtwire legal analyst team’s primer on this matter.
 ANATEL is the government agency responsible for telecommunication concessions supervisor, among other responsibilities regarding the telecommunication public services providing.
 A provisional measure goes into immediate effect for 60 days, subsequently becoming a regular law pending congressional approval.
by Arthur Almeida
Arthur Almeida is a former restructuring attorney. Prior to joining Debtwire as a Legal Analyst, he practiced with Passos & Sticca Advogados Associados, as well as working in the legal department of Banco Fibra S.A. Arthur’s experience includes participating in major civil litigation on credit recovery. He has represented creditors such as banks and financial institutions in high-profile restructurings.
Any opinion, analysis or information provided in this article is not intended, nor should be construed, as legal advice, including, but not limited to, investment advice as defined by the Investment Company Act of 1940. Debtwire does not provide any legal advice and subscribers should consult with their own legal counsel for matters requiring legal advice.