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Is PORTEL Really A Real Play?

27 April 2015 by lberuti

Since the beginning of March, PORTEL (Portugal Telecom) has massively underperformed the market. Because the debt of the company is guaranteed by Oi SA, the company offering fixed-line and mobile telecommunications services in Brazil, it has been used as a proxy for emerging risks in South America and particularly as a play on the Real weakness. But technicals can complicate the picture in CDS. Most of the euro denominated bonds issued by PORTEL are trading at positive basis compared with the CDS and seem to be pricing in an early redemption. As Oi’s dollar bonds do not appear to be deliverable into the CDS (a succession event is deemed unlikely by analysts), if the early redemption thesis is confirmed, PORTEL’s CDS will be orphan with no deliverable debt. That could well explain the 40bps tightening that took place over the last two trading sessions.