Portugal Telecom slides following Citi downgrade, Oi falls harder

|About: Portugal Telecom SGPS SA (PT)|By:, SA News Editor

A day after Portugal Telecom (PT -3.1%) and Brazilian mobile unit Oi (OIBR -13.1%) both soared in response to the carriers' merger announcement, PT fell with the help of a Citi downgrade to Neutral.

Oi fell harder, likely due to debt and Brazilian macro concerns. S&P has put Oi's debt ratings (already BBB-) on watch for a downgrade, and points out the deal requires the carrier to raise R$7B-$8B ($3.16B-$3.62B) in capital. R$2.5B-$3.5B will be used to give Oi a cash infusion, while R$4.5B will be used to pay down existing debt.

Moody's is maintaining its Baa3 rating for Oi with a negative outlook, but is putting its Ba2 rating for PT on review for an upgrade, citing Oi's guarantee to give PT bondholders to either have their debt paid off or converted into newly-issued bonds.

The agency also praises the merger's synergies, and expects the combined company to start producing positive free cash flow in 2015.

Also: Telecom Italia CEO Franco Bernabe has resigned. That should pave the way for TI to put its Brazilian unit on the block; many think a major foreign carrier such as AT&T or Vodafone will end up buying it.