Court Urges Oi, V.tal to Negotiate, Takes Unprecedented Bid to Exit Chapter 15 for Chapter 11 Under Advisement Pending Brazilian Court Decision

Relevant Document:
Agenda

After hearing closing arguments today, Judge Lisa G. Beckerman took under advisement the Oi SA debtors’ motion to terminate chapter 15 recognition of their Brazilian recuperação judicial, or RJ, proceedings and dismiss the chapter 15 cases.

Judge Beckerman indicated she will “honor” a Brazilian court request and defer issuing a decision on the termination request until the RJ court rules on the consequences of Oi’s noncompliance with and requested amendment to its RJ plan. The judge said she will be prepared to rule on a “timely basis” once the RJ court acts.

The chapter 15 termination is opposed by V.tal, aka Rede Neutra de Telecomunicações SA, an Oi contract counterparty and postpetition DIP lender in the RJ proceedings. Oi is requesting termination of chapter 15 recognition of the RJ proceedings in preparation for a potential chapter 11 filing to address a severe liquidity crisis that the RJ plan has failed to resolve. Absent a chapter 11 filing, Oi says that it may be forced into a “value-destructive” liquidation in Brazil, known as a falência.

At today’s hearing, Judge Beckerman urged Oi and V.tal to negotiate, given the extensive connections between the two companies.

The court heard testimony today from V.tal’s Brazilian law expert Daniel Carnio Costa, the former presiding judge of the First Bankruptcy and Reorganization Court of São Paulo. Judge Beckerman sustained the debtors’ objection to the Associação Brasileira de Special Situations e Litigation Finance’s motion to file an amicus brief. The association’s brief warned that a potential restructuring of postpetition RJ financing would be contrary to Brazilian law and undermine the market for DIP financing in Brazil. The judge denied the motion as untimely.

Octus’ coverage of day one of the termination hearing is available HERE.

Judge Beckerman’s questioning focused on the “unprecedented” request to dismiss a chapter 15 case after the entry of an order granting recognition of a foreign plenary restructuring. The judge noted that she is considering how to properly balance both what has happened and what may happen in the future, given the hypothetical nature of Oi’s chapter 11 filing. Judge Beckerman also explored the need to receive U.S. and Brazilian court approval of sale and financing transactions in the event Oi pursues a chapter 11 filing if she terminates recognition.

David Schiff of Davis Polk appeared today for an ad hoc group of Oi noteholders. Schiff noted that the noteholders are not objecting to termination, but underscored that the relief granted with termination should be prospective to avoid disturbing debt issued under the current RJ plan. Although the noteholders are “not endorsing” Oi’s chapter 11 strategy, Schiff voiced the noteholders’ support for a consensual resolution due to the risk of “value destruction” in a liquidation.

Schiff disclosed that the group holds a majority of the 2027 and 2028 New York secured notes issued under the RJ plan. Schiff reviewed that the 2027 “new priority secured notes” consist of postpetition DIP financing that rolled into exit financing and that the 2028 “rollup” notes were issued as take-back debt under the RJ plan.

Schiff noted that the priority secured noteholders and V.tal share pari passu priority security interests in Oi’s minority equity interests in V.tal, with the rollup notes holding interests lower in the waterfall. Schiff said there is an active process for the sale of the shares that may include an option for V.tal and the noteholders to credit-bid their claims. Schiff observed that a restructuring of the notes is essentially “already happening,” with noteholders consensually agreeing to receive payment-in-kind, but he asserted that there is a need for a “long-term solution.”

Oi’s counsel Richard Kebrdle of White & Case conceded that the chapter 15 debtors’ termination request is unprecedented. Although the debtors have previewed a potential chapter 11 in the interest of transparency, Kebrdle argued that the “propriety” of a U.S. plenary restructuring should be disconnected from the ruling on termination and dismissal.

Kebrdle asserted that the RJ proceedings, while still active, have shifted from a restructuring to a “supervisory” phase, justifying dismissal. Kerbrdle insisted that the RJ plan has been “substantially consummated” if viewed under U.S. legal standards, given that the company now has a new debt structure and management in place. Although Oi is seeking to amend the RJ plan, Kerbrdle said that the amendment focuses on relatively minor amounts of trade and labor claims.

According to Kebrdle, the intercreditor agreement for Oi’s DIP-to-exit financing in the RJ cases expressly contemplates a U.S. restructuring, undermining V.tal’s claims that it could be prejudiced. Kebrdle asserted that V.tal, as a holder of Brazilian debt, did not rely on the chapter 15 recognition order, which facilitated the restructuring of New York law-governed debt. V.tal should not be allowed to keep Oi “hostage” in its chapter 15 cases, Kebrdle insisted.

Judge Beckerman observed that Bankruptcy Code section 1517(d) sets a “high standard” for termination, requiring that the grounds for granting recognition have “ceased to exist.” The judge asked why the debtors are not instead seeking to close the cases as fully administered under section 350.

Kebrdle explained the request for dismissal, rather than closure, is directed at avoiding the strictures of section 1528. That provision provides that any chapter 11 proceeding filed after a recognition order in a chapter 15 case is “restricted” to a debtors’ U.S.-based assets, preventing a global restructuring of Oi’s predominantly Brazilian-based assets. Kebrdle noted that the chapter 15 cases would be subject to reopening if they are not dismissed.

Judge Beckerman reiterated that she will not “hamstring” the future chapter 11 court with an advisory opinion by finding in the dismissal order that section 1528 does not apply.

Responding to the judge’s push to negotiate, Kebrdle said the company is open to all options and offered to adjourn the termination hearing to the extent liquidity allowed. Kebrdle also previewed the recent issuance of an order from the Brazilian appellate court overseeing the RJ proceedings, which he characterized as “similar” to a ruling issued by the RJ court last week.

Benjamin Finestone of Quinn Emanuel, counsel to V.tal, asserted his client made a “principled response” to an “attack plan” and will not negotiate until the termination motion is withdrawn. Finestone added that discovery has confirmed that Oi is seeking termination as a “negotiating tactic.”

According to Finestone, V.tal is defending not only its own interests but also those of other Brazilian creditors. Finestone also defended the capability of the Brazilian courts to complete Oi’s restructuring or to put the company into liquidation, if necessary. He pointed to the Brazilian courts’ active consideration of the RJ amendment, saying the involvement of court fiduciaries and regulatory authorities shows that no one is “asleep at the switch.”

Finestone argued that the ongoing activities in the RJ proceedings demonstrate that the Brazilian cases are far from substantially consummated or fully administered, barring dismissal under any standard. Finestone also cited the potential need for the RJ plan amendment to be recognized as a basis to keep the chapter 15 cases active.

Regarding the potential chapter 11 plan, Finestone argued the filing would cause “chaos,” especially if the Brazilian court authorizes a falência. He asserted that Oi’s suggestion that it could avoid a policy conflict by not seeking recognition of the chapter 11 “would only make things worse,” subjecting creditors to confusing and inconsistent treatment under U.S. and Brazilian law.

In addition to circumventing a bar on filing another RJ proceeding, Finestone asserted that the unprecedented attempt to restructure Oi’s postpetition obligations to V.tal would disrupt the Brazilian market for DIP financing.

Finestone argued that any chapter 11 process would be “administratively insolvent” from the outset and likely result in lower recoveries than many creditors would recover in liquidation. Further, Finestone asserted that the debtors have unsurprisingly failed to secure DIP financing to support a U.S. filing, given that they are “trying” to pledge collateral that has already been pledged in Brazil. “The market has spoken,” he added.

In sum, Finestone said a chapter 11 filing would set up a “platter of inconsistent” court decisions that would result in “complete confusion for creditors.”

V.tal’s expert witness Costa opined that any reorganization of Oi in a chapter 11 proceeding would not be recognized in Brazil as “manifest violation of national public policy.” Costa also addressed concerns over the prospect of liquidating, noting that falência proceedings now allow for going-concern sales after recent changes in Brazilian law. Judge Beckerman asked Costa if the Brazilian government would intervene given the company’s importance to the country’s telecom sector. Costa replied that the government “should and will step in.”