SÃ O PAULO—Shares of Brazil's largest bank took a hit Tuesday, a day after telephone company Oi SA filed the nation's largest request ever for bankruptcy protection and raised the likelihood of steep losses for creditors owed nearly $19 billion by the troubled carrier.

State-controlled Banco do Brasil SA, the country's biggest bank by assets, finished down 4.5%. Oi's shares fell 18%.

Private-sector lenders Itau Unibanco Holding SA and Banco Bradesco SA opened lower, then recovered over the course of the day. Itau ended at 29.39 reais, from 29.40 on Monday, after falling as much as 2.6% during the day, and Banco Bradesco SA fell as much as 1.8% before turning positive before the close of trading.

Oi's debt to Banco do Brasil is estimated at more than 5 billion Brazilian reais, while Itau and Bradesco are said to be owed some 1.5 billion reais each by the telecommunications company, according to Joã o Pedro Brugger, an analyst at investment company Leme Investimentos. The three banks declined to comment.

At the end of March, about one-quarter of the roughly 50 billion reais ($14.75 billion) Oi owed to lenders was in the hands of commercial banks. Oi owes billions more to Brazil's tax agency, the country's telecoms regulator and others. Monday's filing by Oi and six subsidiaries lists 65.4 billion reais ($19.26 billion) in total debt.

A brutal recession has sent bankruptcy filings soaring in Brazil, forcing banks to boost their reserves. Oi´ s bankruptcy protection request will further weigh on the financial sector, said Luis Miguel Santacreu, an analyst with credit-ratings firm Austin Rating.

"This happens at a difficult time [for Brazil] and requests for bankruptcy protection will probably continue to increase," he said.

Oi's shares were suspended several times on Tuesday as the price of its preferred shares plunged as much as 30% soon after they started trading. The shares fell as much as 31% during the day and closed down 18.2%, while the benchmark Ibovespa index finished up 1%.

Fitch Ratings, Standard & Poor's and Moody's Investors Service all said Tuesday they downgraded their ratings for Oi. Fitch, which had downgraded Oi just last Friday as well, cited the phone company's "debt-laden precarious capital structure" and negative free cash flow generation.

Oi, Brazil's fourth-largest telecom firm, blamed its financial collapse on a series of factors, including heavy borrowing to complete mergers and acquisitions that have not helped the firm close the technology gap with its main competitors.

Telecoms clients now favor mobile telephones and broadband internet access, and Oi has had less success than its competitors in penetrating those two markets. Oi's two mergers, with Brasil Telecom SA and Portugal Telecom SGPS SA, failed to have the desired effect of improving its balance sheet.

"Oi has financial and operations problems, competition is hard, the market is very regulated and technology becomes obsolete fast," said Alexandre Furtado Montes, a telecommunications analyst at Rio de Janeiro-based consulting firm Lopes Filho.

The company posted a net loss of 1.64 billion reais (about $476 million) in the first quarter, compared with a loss of 447 million reais in the prior-year period. Net revenue dropped 4% over the same period.

Oi, which has a 34.4% share of Brazil's fixed-line market and about 70 million clients, asked a Rio de Janeiro court late Monday for protection from creditors, the equivalent to a chapter 11 filing in the U.S., after debt restructuring talks with creditors recently.

Earlier this month, Chief Executive Officer Bayard Gontijo resigned while the talks were still open. The company gave no specific reason for his departure, but people close to him said he backed a proposal to convert debt into equity and give bondholders a controlling stake in the restructured company.

The plan, however, was opposed by the firm´ s main shareholder, Bratel BV, which was created by former shareholders of Portugal Telecom using the official name Pharol SGPS. Pharol controls 27.2% of Oi shares directly and indirectly through its subsidiaries.

"The main reason for Oi´ s bankruptcy protection request is Pharol," Mr. Montes said, noting Oi has a market capitalization of only about 1 billion reais, and owes more than 30 times its value to international creditors. Shareholders "lost the company a long time ago, it's no longer theirs," he added.

Pharol supported Oi's bankruptcy filing plan, and rejected the deal favored by Mr. Gontijo, because it didn't want to dilute its stake so sharply, according to people familiar with the situation. Pharol on Tuesday said it reaffirms its "determination to continue to defend the value of its main asset."

Shareholders including Pharol had been negotiating with creditors represented by investment bank Moelis & Co, which will continue working with international investors such as Pacific Investment Management and Co., Citadel LLC and Wellington Management Co, according to a person close to the negotiations.

The indebted company could also be sold or merge with a local or international telecommunications player, some analysts said.

Oi could also sell only a specific business or one of its subsidiaries, said Arthur Almeida, a Sã o Paulo-based legal analyst at Debtwire Analytics. Its large base of fixed-line clients could be helpful to a competitor wanting to expand its businesses in other segments as well, Mr. Almeida noted.

"It's possible one of the larger telecommunications companies operating in Brazil may show interest in Oi. It's also viable that an international candidate could come up, as Brazil is cheap for outsiders, " said Leme's Mr. Brugger.

Oi has been roiled by management instability and failed attempts to find new sources of capital. Marco Schroeder, who replaced Mr. Gontijo earlier in this month, is the company's sixth chief executive since 2011. A potential deal with Russian billionaire Mikhail Fridman to help Oi finance a merger with Telecom Italia SpA's Brazilian unit fell through in February.

Local news media have reported that Egyptian billionaire Naguib Sawiris, owner of Global Telecom, is considering purchasing part of Oi.

Write to Luciana Magalhaes at Luciana.Magalhaes@dowjones.com, Rogerio Jelmayer at rogerio.jelmayer@wsj.com and Patricia Kowsmann at patricia.kowsmann@wsj.com

 

(END) Dow Jones Newswires

June 21, 2016 21:25 ET (01:25 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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