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No Two EM Bankruptcies the Same

Oi’s Dutch units may be forced to declare bankruptcy in the Brazilian telecom giant’s ongoing bankruptcy saga. Whilst distressed EM companies with offshore assets in DMs are appealing, bankruptcies across the EM world are nuanced and carry unique consequences for investors.

Dec 5, 2016 // 3:33PM

Brazilian phone carrier Oi, which entered bankruptcy in June, has said the Dutch judicial authorities could require two of its units based in the Netherlands, Oi Brasil Holdings Cooperatief and Portugal Telecom International Finance, to enter bankruptcy proceedings in Brazil.

Oi has filed for the protection of BRL65.4bn (US$19bn) in obligations, of which around BRL34bn (US$10bn) is in bonds, according to Reuters. BRL25bn (US$7.35bn) of these bonds are held by the company’s Dutch units.

This brings into question the liquidation of such assets. Although Oi’s Dutch units currently have a ‘suspension of payments’ legal status, which protects a company from creditors, allowing it time to reorganise, this status could be revoked if required by Dutch judicial authorities.

If these units were to enter bankruptcy, they could then be liquidated in order to repay creditors. However, this has not always been the case for bankrupt EM companies with assets located abroad, particularly in DMs.

Mexican glassmaker Vitro saw creditors try to go after the company’s US assets, although they were prevented from doing so because they had to go through New Orleans law, rather than Mexican law. Nevertheless, an underdeveloped restructuring system like that many believe to be present in Brazil is a net negative for investors. The legal system in jurisdictions like the US and UK tend to be more creditor-friendly.

“If a company has assets in a DM it is broadly positive for creditors, as it is difficult for the bankrupt company to pull tricks and provides more clarity to creditors. But it is impossible to say this as a general rule,” said one distressed credit investor.

The question over Oi’s offshore assets, on top of Brazil’s already complicated bankruptcy laws, highlights the difficulties for both investors and borrowers over bankruptcy proceedings across EMs. Such complications vary from region to region.

The investor noted that whilst all successful EM companies look broadly similar, each bankruptcy is a little different.

“There are some issuers who are in default in the UAE that have overseas assets, and some creditors have gone after these assets, but most of the issuers in the country have their assets located in the same area,” said Gus Chehayeb, Founding Partner and Chief Investment Officer at SanctaCapital Group.

It is a similar case for Sharia-compliant issuers, where the underlying assets backing any sukuk tend to be local to the issuer’s domicile. “There are not many companies in the region that have their debt held overseas in a vehicle. Their debt is typically held locally.”

The fact that operations in the region are not usually as spread across various domiciles means that bankruptcy cases in the Middle East tend to be more straightforward than what Oi is currently experiencing.

One exception to this rule is Saudi Arabia’s Saad-Gosaibi. “It has been a very complicated restructuring as its assets are scattered all over the globe in various different jurisdictions, from the US and the Cayman Islands to Bahrain,” Chehayeb noted.

A total of 90 banks out of 109 identified claimants, representing 60% of the company’s total debt, are said to be involved in the company’s bankruptcy proceedings.

Other countries have acted to streamline and simplify their bankruptcy regimes. In the UAE for instance, enforcements and legal rights need to be attached to assets, making restructurings more challenging.

The UAE government has attempted to tackle this with the implementation of a new bankruptcy law in October, although Chehayeb noted that it remains to be seen how the law will work in practice.

Americas Policy & Government Middle East Brazil

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