Portugal Telecom Debt Deal Criticized by Brazil’s BNDES

Jul 08, 2014 5:14 pm ET

(Updates with closing share price in fourth paragraph.)

July 8 (Bloomberg) -- Portugal Telecom SGPS SA’s acquisition of debt from a shareholder’s holding company is being criticized by Brazil’s state development bank, which said the deal lacks good corporate governance.

BNDES, as the bank is known, is seeking more information on the deal between Portugal Telecom and a subsidiary of Grupo Espirito Santo, or GES, one of Portugal Telecom’s largest shareholders with a 10 percent stake. Portugal Telecom bought 897 million euros ($1.22 billion) of commercial paper in April from Rioforte, a holding company controlled by GES.

The transaction isn’t consistent “with minimum standards of good corporate governance,” BNDES said today in an e-mailed statement. Oi SA, the Brazilian telephone company merging with Portugal Telecom, said last week it wasn’t aware of the deal.

Oi shares fell 5.7 percent to 1.66 reais in Sao Paulo, the lowest closing price on record. Portugal Telecom dropped 5.1 percent to 2.12 euros in Lisbon, also a record low.

Investors are speculating Rioforte won’t be able to make payments on the paper due July 15 and July 17, which would saddle Portugal Telecom with losses and increase its debt leverage, according to Rafael Elias, an analyst at Credit Agricole SA. If the merger closes later this year as expected, the combined company would inherit the consequences of the Rioforte debt investment, prompting Standard & Poor’s to say on July 4 that it may cut Oi’s credit rating.

Brazilian securities regulator CVM last week said in an e- mailed response to questions that it’s analyzing the case and will take measures if necessary. The nation’s telecommunications regulator, Anatel, is monitoring the situation to see if it puts Oi’s landline license at financial risk, Superintendent Carlos Baigorri said at the time in a telephone interview.