Wry & Dry

From investment grade to bankruptcy in 4 months.

It's not a good year for Brazil.  On top of the Olympic Games' woes [insert here any one of 37 problems], economic woes [insert here your choice of any negative economic statistic] and political woes (President impeached for a start), what else could possibly go wrong?

Well, how about the largest bankruptcy in Brazil's history?  

On Monday Oi SA, the country's largest fixed-line telecoms group, filed for bankruptcy, owing about $19 billion.*


It has been trying to “restructure” its debt by stiffing creditors and practically wiping out stockholders. But ten days ago, CEO Bayard Gontijo resigned over a disagreement with some board members on the negotiations with the creditors.

Last week, talks fell apart when board members rejected a plan by bondholders to swap their bonds for 95% of the company’s equity.

These creditors are licking their wounds. According to Bloomberg, the bankruptcy could also “trigger payments on $14 billion of derivatives contracts that are designed to pay out in an event of a default.”

Shareholders will be left with next to nothing. 

So what?  Just another bankruptcy?

Err, well, not quite.  Y'see, just four months ago credit ratings agency Fitch** rated Oi SA's bonds as investment grade!

Oi’s problems have been festering for years, with negative free cash-flow as far back as the eye could see, and with debt up to the gunnels.  The problems were no surprise.

With financial and operating problems that have been obvious for all to see, how can a ratings agency make the trip from investment grade to bankruptcy in four months?  Well, via hasty, last-minute, multiple-notch, mega-downgrades.

But this is why ratings agencies are still a joke, despite the bitter lessons learned during the GFC when they slapped triple-A ratings on subprime mortgage-backed securities shortly before those securities imploded.

Of course, ratings agencies are still being paid by the issuer and thus are reluctant to bite the hand that feeds them.

Investors are on their own, always eager to get fleeced in their search for yield!

*  Thanks to wolfstreet.com for the inspiration for this story.

**A competitor to Moodys and Standard & Poors.