| FINANCIAL INSTRUMENTS AND RISK ANALYSIS | 3. FINANCIAL INSTRUMENTS AND RISK
ANALYSIS
3.1. Overview
The table below summarizes our financial assets and financial
liabilities carried at fair value at December 31, 2015 and
2014.
Accounting measurement 2015 2014
Carrying amount Fair value Carrying amount Fair value
Assets
Cash and banks Fair value 1,111,840 1,111,840 532,285 532,285
Cash equivalents Fair value 13,786,223 13,786,223 1,916,921 1,916,921
Short-term investments Fair value 1,927,686 1,927,686 282,700 282,700
Derivative financial instruments Fair value 7,386,703 7,386,703 3,221,481 3,221,481
Accounts receivable (i) Amortized cost 8,379,719 8,379,719 7,455,687 7,455,687
Held-for-sale assets (Note 26)
Available-for-sale financial asset Fair value 3,541,314 3,541,314 4,284,416 4,284,416
Dividends receivable Amortized cost 2,042,191 2,042,191 1,261,826 1,261,826
Liabilities
Trade payables (i) Amortized cost 5,004,833 5,004,833 4,331,286 4,331,286
Borrowings and financing
Borrowings and financing (ii) Amortized cost 17,049,280 17,049,280 15,335,155 15,335,155
Debentures Amortized cost 4,138,025 4,128,539 7,776,876 7,513,867
Senior notes Amortized cost 38,670,111 22,159,838 12,737,364 12,199,092
Derivative financial instruments Fair value 2,510,343 2,510,343 666,922 666,922
Dividends and interest on capital Amortized cost 96,433 96,433 185,138 185,138
Licenses and concessions payable (iii) Amortized cost 918,537 918,537 1,361,940 1,361,940
Tax refinancing program (iii) Amortized cost 795,088 795,088 990,230 990,230
Other payables (payable for the acquisition of equity
interest) (iii) Amortized cost 382,230 382,230 408,978 408,978
(i) The balances of accounts receivables
and trade payables have near terms and, therefore, they are not
adjusted to fair value.
(ii)
Part of this balance of borrowings and financing with
the BNDES and export credit agencies correspond to exclusive
markets and, therefore, the fair values of these instruments is
similar to their carrying amounts. A portion of the balance of
borrowings and financing refers to the bonds issued in the
international market, for which is there is a secondary market, and
their fair values are different from their carrying amounts.
(iii) The licenses and concessions payable,
the tax refinancing program, and other obligations (payable for the
acquisition of equity interest) are stated at the amounts that
these obligations are expected to be settled and are not adjusted
to fair value.
Fair value of financial instruments
The Company and its subsidiaries have measured their financial
assets and financial liabilities at fair value using available
market inputs and valuation techniques appropriate for each
situation. The interpretation of market inputs for the selection of
such techniques requires considerable judgment and the preparation
of estimates to obtain an amount considered appropriate for each
situation. Accordingly, the estimates presented may not necessarily
be indicative of the amounts that could be obtained in an active
market. The use of different assumptions for the calculation of the
fair value may have a material impact on the amounts.
(a) Derivative financial
instruments
The method used for calculating the fair value of derivative
financial instruments was the future cash flows associated to each
instrument contracted, discounted at market rates prevailing at
December 31, 2015.
(b) Non-derivative financial
instruments measured at fair value
The fair value of securities traded in active markets is equivalent
to the amount of the last closing quotation available at the end of
the reporting period, multiplied by the number of outstanding
securities.
For the remaining contracts, the Company carries out an analysis
comparing the current contractual terms and conditions with the
terms and conditions effective for the contract when they were
originated. When terms and conditions are dissimilar, fair value is
calculated by discounting future cash flows at the market rates
prevailing at the end of the period, and when similar, fair value
is similar to the carrying amount on the reporting date.
(c) Fair value measurement
hierarchy
Fair value is the price for which an asset could be exchanged, or a
liability settled, between knowledgeable, willing parties, in an
arm’s length transaction on measurement date. The fair value
is be based on the assumptions that market participants consider in
pricing an asset or a liability, and in the establishment a
hierarchy that prioritizes the information used to build such
assumptions. The fair value measurement hierarchy attaches more
importance to available market inputs (i.e., observable data) and a
less weight to inputs based on data without transparency (i.e.,
unobservable data). Additionally, the Company considers all
nonperformance risk aspects, including the entity’s credit,
when measuring the fair value of a liability.
The classification of an instrument in the fair value measurement
hierarchy is based on the lowest level of input significant for its
measurement. We present below a description of the three-level
hierarchy:
Level 1—inputs consist of prices quoted (unadjusted) in
active markets for identical assets or liabilities to which the
entity has access on measurement date;
Level 2—inputs are different from prices quoted in active
markets used in Level 1 and consist of directly or indirectly
observable inputs for the asset or liability. Level 2 inputs
include quoted prices for similar assets or liabilities in active
markets, quoted prices for identical assets or liabilities in
markets that are not active; or inputs that are observable for the
asset or liability or that can support the observed market inputs
by correlation or otherwise for substantially the entire asset or
liability.
Level 3—inputs used to measure an asset or liability are not
based on observable market variables. These inputs represent
management’s best estimates and are generally measured using
pricing models, discounted cash flows, or similar methodologies
that require significant judgment or estimate.
There were no transfers between levels between December 31, 2015
and December 31, 2014.
Fair value measurement hierarchy Fair value 2015 Fair value 2014
Assets
Cash and banks Level 1 1,111,840 532,285
Cash equivalents Level 2 13,786,223 1,916,921
Short-term investments Level 2 1,927,686 282,700
Derivative financial instruments Level 2 7,386,703 3,221,481
Available-for-sale financial asset (Note 26) Level 3 3,541,314 4,284,416
Liabilities
Derivative financial instruments Level 2 2,510,343 666,922
3.2. Measurement of financial assets
and financial liabilities at amortized cost
The fair value of the financial instruments mentioned below are
substantially close to its carrying amounts due to the following
reasons:
• Accounts receivables: near-term
maturity of bills.
• Trade payables, dividends and
interests on capital: all obligations are due to be settled in the
short term.
• Borrowings and financing: all
transactions are adjusted for inflation based on contractual
indices.
• Licenses and concessions payable, tax
refinancing program and other payables (payable for the acquisition
of equity interests): all payables are adjusted for inflation based
on the contractual indices.
3.3. Financial risk management
The Company’s and its subsidiaries’ activities an
exposed them to several financial risks, such as: market risk
(including currency variation risk, interest rate risk on fair
value, interest rate risk on cash flows, and price risk), credit
risk, and liquidity risk. The Company and its subsidiaries use
derivative financial instruments to mitigate certain exposures to
these risks.
Risk management is carried out by the Company’s treasury
officer, in accordance with the policies approved by
management.
The Hedging and Cash investments Policies, approved by the Board of
Directors, document the management of exposures to market risk
factors generated by the financial transactions of Oi Group
companies.
Under Company policies, market risks are identified based on the
features of financial transactions contracted and to be contracted
during the year. Several scenarios are then simulated for each of
the risk factors using statistical models, used as basis to measure
the impacts on Group’s financial income (expenses). The Board
of Directors meeting of January 2016 widened this concept, to also
monitor impacts on Group’s financial cash flow, gross debt
and net debt. Based on this analysis, the Executive Committee
annually agrees with the Board of Directors a guideline to be
followed in each financial year.
To ensure a proper risk management, the Company can contract and
reverse hedging instruments, including derivative transactions such
as swaps and currency forwards. The contract of such instruments
depends on, among other factors, available funds within the credit
limit set by banks. The Company and its subsidiaries do not use
derivative financial instruments for other purposes.
According to their nature, financial instruments may involve known
or unknown risks, and it is important to assess to the best
judgment the potential of these risks.
3.4.1. Market risk
(a) Foreign exchange risk
Financial assets
Foreign currency-denominated cash equivalents and short-term
investments are basically maintained in securities issued by
financial institutions abroad similar to Bank Certificates of
Deposit (CDBs) traded in Brazil (time deposits), and
euro-denominated time deposits and United States dollars
(“dollar” or “dollars”).
The risk associated to these assets arises from the possible
exchange rate changes that may reduce the balance of these assets
when translated into Brazilian reais. The Company’s and its
subsidiaries’ assets subject to this risk represent
approximately 73.22% (11.41% at December 31, 2014) of our total
cash and cash equivalents and short-term investments.
Net investment in foreign subsidiaries
The risks related to the Company’s investments in foreign
currency arise mainly from the investments in the subsidiaries in
Africa. The Company does not have any contracted instrument to
hedge against the risk associated to the net investments in foreign
companies.
Foreign exchange risk sensitivity analysis
Management estimated the impact of a potential depreciation of the
euro and the US dollar by 25% and 50%, using as benchmark for the
possible and remote scenarios, respectively, as follows:
Rate
Description 2015 Depreciation
Probable scenario
US dollar 3.9048 0 %
Euro 4.2504 0 %
Possible scenario
US dollar 2.9286 25 %
Euro 3.1878 25 %
Remote scenario
US dollar 1.9524 50 %
Euro 2.1252 50 %
2015
Description Individual risk Probable scenario Possible scenario Remote scenario
US dollar cash Dollar 642,418 481,814 321,209
Euro cash Euro 12,438,363 9,328,772 6,219,182
Total associated to exchange rates 13,080,781 9,810,586 6,540,391
Financial liabilities
The Company and its subsidiaries have foreign currency-denominated
or foreign currency-indexed borrowings and financing. The risk
associated with these liabilities is related to the possibility of
changes in foreign exchange rates that could increase the balance
of such liabilities. The Company and subsidiaries borrowings and
financing exposed to this risk represent approximately 78.5% (41.7%
at December 31, 2014) of total liabilities from borrowings and
financing, less the contracted currency hedging transactions. In
order to minimize this type of risk, we enter into foreign exchange
hedges with financial institutions. Of the consolidated foreign
currency-denominated debt, 99.5% (100.0% at December 31, 2014) is
protected by exchange swaps, currency forwards, and short-term
investments in foreign currency. The cash denominated in euros and
in US dollar operates as a natural hedge for the foreign
denominated debt.
These foreign currency-denominated financial assets and financial
liabilities are presented in the balance sheet as follows:
2015 2014
Carrying amount Fair value Carrying amount Fair value
Financial assets
Cash and banks 761,788 761,788 26,759 26,759
Cash equivalents 10,553,452 10,553,452 198,047 198,047
Short-term investments 1,765,541 1,765,541 86,807 86,807
Derivative financial instruments 6,940,963 6,940,963 3,025,464 3,025,464
Financial liabilities
Borrowings and financing (Note 16) 46,935,152 30,727,817 14,781,242 14,342,043
Derivative financial instruments 1,915,910 1,915,910 425,784 425,784
Derivative financial instruments are summarized as follows:
Derivatives designated for hedge
accounting
Maturity (years) Fair value
Amounts (payable)/receivable
2015 2014
US$/R$ cross currency swaps
0.1 - 8.2 4,954,291 1,816,206
US$/fixed rate cross currency swaps 4.8 819,647 649,293
EUR/R$ cross currency swaps 1.9 - 4.3 (169,513 )
EUR/R$ non-deliverable forwards (NDFs)
< 1 year 23,524
Derivatives not designated for hedge accounting
Maturity (years) Fair value
Amounts (payable)/receivable
2015 2014
US$/R$ cross currency swaps
< 1 year 31,467 24,122
R$/US$ cross currency swaps < 1 year (27,965 ) (31,290 )
US$/R$ non-deliverable forwards (NDFs) < 1 year (156,707 ) 107,718
EUR/R$ non-deliverable forwards (NDFs) < 1 year (427,452 ) 10,107
Options (USD/R$ put option) 3.3 - 4.8 8,783
Options (EUR/R$ put option) 3.8 24,767
Options (EUR/R$ call option) 3.8 (32,265 )
The main foreign currency hedge transactions contracted with
financial institutions to minimize the foreign exchange risk are as
follows:
Cross currency swap contracts (plain vanilla)
US$/R$: Refer to foreign exchange swaps to protect its US
dollar-denominated debt payments. Under these contracts, the asset
position is in US dollars plus a fixed interest rate or in US LIBOR
plus a fixed interest rate, and the liability position a percentage
of interbank deposit rate (CDI) or a fixed rate in Brazilian Real.
The main risk of loss in the asset position of these instruments is
the US dollar exchange rate change; however, such losses would be
fully offset by the US dollar-denominated debt’s
maturities.
R$/US$: Refer to foreign exchange swaps to reverse swap contracts.
Under these contracts, the asset position is in US dollar plus a
fixed rate and the liability position is a percentage of CDI. The
main risk of loss in the liability position of these instruments is
the US dollar exchange rate change; however, such possible losses
would be fully offset by the maturities of the reversed US
dollar-denominated swaps.
Non-deliverable forwards (NDFs)
US$/R$: Refer to future US dollar purchase transactions using NDFs
to hedge against a depreciation of the Brazilian real in relation
to the US dollar. The main strategy for these contracts is to set
the foreign exchange rate for the contract period at a fixed
amount, thus mitigating the risk of adverse fluctuations on US
dollar-denominated debt. In order to extend the hedging period, we
can roll over these instruments by selling US dollars for the
period equivalent to the short-term NDF in the portfolio and
simultaneously purchase US dollars for longer positions.
Euro/R$: Refer to future Euro dollar purchase transactions using
NDFs to hedge against a depreciation of the Brazilian real in
relation to the US dollar. The main strategy for these contracts is
to set the foreign exchange rate for the contract period at a fixed
amount, thus mitigating the risk of adverse fluctuations on
euro-denominated debt. In order to extend the hedging period, we
can roll over these instruments by selling euro for the period
equivalent to the short-term NDF in the portfolio and
simultaneously purchase euro for longer positions.
Options (put options)
Refers to the purchase of dollar put options related to
debt’s principal to hedge against an appreciation of the real
against the dollar. The main strategy of these options is to set a
threshold foreign exchange rate for a set of swaps during the
contract period, thus mitigating unfavorable changes in the long
position of these derivatives.
As at December 31, 2015 and 2014, the derivative transactions in
the amounts shown below were recognized in financial income
(expenses) (see Note 6):
2015 2014
Gain (loss) on currency swaps 4,539,844 674,228
Currency forwards 1,322,916 (317,740 )
Options (21,850 )
Total 5,840,910 356,488
The movements below, related to currency hedges designated for
hedge accounting treatment, were recognized in other comprehensive
income:
Table of movements in hedge accounting effects in
other comprehensive income
Balance in 2012 128,127
Loss on designated hedges (126,511 )
Transfer on ineffective portion to profit or loss (16,611 )
Amortization of hedges to profit or loss at effective rate 36,072
Deferred taxes on hedge accounting 36,397
Balance in 2013 57,474
Gain on designated hedges 143,524
Transfer on ineffective portion to profit or loss 10,443
Amortization of hedges to profit or loss at the effective rate 9,081
Deferred taxes on hedge accounting (55,437 )
Balance in 2014 165,085
Gain on designated hedges (697,726 )
Transfer on ineffective portion to profit or loss (7,626 )
Amortization of hedges to profit or loss at the effective rate 8,336
Deferred taxes on hedge accounting 236,985
Balance in 2015 (294,946 )
(a.1) Foreign exchange risk sensitivity analysis
As at December 31, 2015, management estimated the depreciation
scenarios of the Brazilian real in relation to other currencies at
yearend. The rates used for the probable scenario were the rates
prevailing at the end of December 2015. The probable rates were
then depreciated by 25% and 50% and used as benchmark for the
possible and remote scenarios, respectively.
Rate
Description 2015 Depreciation
Probable scenario
US dollar 3.90480 0 %
Euro 4.25040 0 %
Possible scenario
US dollar 4.88100 25 %
Euro 5.31300 25 %
Remote scenario
US dollar 5.85720 50 %
Euro 6.37560 50 %
As at December 31, 2015, management estimated the outflow for the
payment of interest and principal of its debt associated to
exchange rates based on the interest rates prevailing at the end of
this annual reporting period and the exchange rates above.
The impacts of foreign exchange exposure, in the sensitivity
scenarios estimated by the Company, are shown in the table
below:
2015
Description Individual risk Probable scenario Possible scenario Remote scenario
US dollar debt Dollar appreciation 23,054,987 28,818,734 34,582,481
Derivatives (net position - US$) Dollar depreciation (22,470,237 ) (28,087,796 ) (33,705,356 )
US dollar cash Dollar depreciation (642,418 ) (803,023 ) (963,627 )
Euro debt Euro appreciation 24,316,758 30,395,948 36,475,137
Derivatives (net position - euro) Euro depreciation (11,606,953 ) (14,508,691 ) (17,410,430 )
Euro cash Euro depreciation (12,438,363 ) (15,547,954 ) (18,657,545 )
Total associated to exchange rates 213,774 267,218 320,660
(b) Interest rate risk
Financial assets
Cash equivalents and short-term investments in local currency are
substantially maintained in financial investment funds exclusively
managed for the Company and its subsidiaries, and investments in
private securities issued by prime financial institutions.
The interest rate risk linked to these assets arises from the
possibility of decreases in these rates and consequent decrease in
the return on these assets.
Financial liabilities
The Company and its subsidiaries have borrowings and financing
subject to floating interest rates, based on the Long-term Interest
Rate (TJLP) or the CDI, in the case of real-denominated debt, and
on the LIBOR, in the case of U.S. dollar-denominated debt.
As at December 31, 2015, approximately 33.4% (60.3% at December 31,
2014) of the incurred debt, less adjustment for derivative
transactions, was subject to floating interest rates. After the
derivative transactions, approximately 59.6% (79.4% at December 31,
2014) of the consolidated debt was subject to floating interest
rates. The most material exposure of Company’s and its
subsidiaries’ debt after the hedging transactions is to CDI.
Therefore, a continued increase in this interest rate would have an
adverse impact on future interest payments and hedging
adjustments.
We continuously monitor these market rates to assess the possible
contracting of derivatives to reduce the risk of fluctuation of
these rates.
These assets and liabilities are presented in the balance sheet as
follows:
2015 2014
Carrying amount Fair value Carrying amount Fair value
Financial assets
Cash equivalents 3,232,771 3,232,771 1,718,874 1,718,874
Short-term investments 162,145 162,145 195,893 195,893
Derivative financial instruments 445,740 445,740 196,017 196,017
Financial liabilities
Borrowings and financing 18,307,705 18,298,218 17,722,928 17,717,628
Derivative financial instruments 594,433 594,433 241,138 241,138
The amounts of contracted derivatives to manage exposure to
floating interest rates on outstanding debt are summarized
below:
Derivatives designated for hedge
accounting
Maturity (years) Fair value
Amounts (payable)/receivable
2015 2014
Fixed rate/DI rate swaps 4.8 (146,121 ) (37,627 )
US$ LIBOR/US$ fixed rate swaps < 1 year (1,413 )
Derivatives not designated for hedge accounting
Maturity (years) Fair value
Amounts (payable)/receivable
2015 2014
US$ LIBOR/US$ fixed rate swaps 0.1- 6.1 (448,312 ) (200,771 )
US$ fixed rate/US$ LIBOR swaps 6.1 445,740 194,690
The main derivative transactions contracted with financial
institutions to minimize the interest rate risk are as follows:
Interest rate swaps
US$ LIBOR/US$ fixed rate: Refer to interest rate swaps to protect
debt payments associated to US dollar floating rates from
exchange fluctuation. Under these contracts, the asset position in
US dollar LIBOR and the liability position is a fixed rate. The
risk of loss in the asset position of these instruments is,
therefore, the fluctuation of the US dollar LIBOR; however,
such possible losses would be fully offset by maturities of US
dollar-denominated
US$ fixed rate/US$ LIBOR: Refers to the interest rate swap
transaction that changes US dollar-denominated debt payments from
fixed rate to floating rate. Under this contract, the asset
position is a US dollar fixed rate and the liability position is
subject to LIBOR aimed at reducing the cost of the underlying debt,
as part of the Company’s interest-bearing liabilities
management strategy.
R$ fixed rate/CDI: Refer to interest rate swaps to convert a
foreign exchange swap liability position at a fixed rate into R$ to
a liability subject to a DI percentage. This transaction is
intended to swap the foreign exchange fluctuation of a certain
dollar-denominated debt to a floating DI position, cancelling the
debt’s current fixed rate position.
As at December 31, 2015 and 2014, the amounts shown below were
recorded as gain or loss on derivatives: (see Note 6).
2015 2014
Gain (loss) on interest rate swap (43,808 ) 70,896
Total (43,808 ) 70,896
The movements below, related interest rate hedges designated for
hedge accounting treatment, were recognized in other comprehensive
income:
Table of movements in hedge accounting effects in
other comprehensive income
Balance in 2012 12,057
Loss on designated hedges (80,487 )
Transfer on ineffective portion to profit or loss 500
Amortization of hedges to profit or loss at effective rate (24,075 )
Deferred taxes on hedge accounting 35,381
Balance in 2013 (56,624 )
Gain on designated hedges 20,029
Transfer on ineffective portion to profit or loss (97 )
Amortization of hedges to profit or loss at the effective rate 3,070
Deferred taxes on hedge accounting (7,820 )
Share of subsidiary’s hedge accounting
Balance in 2014 (41,442 )
Gain on designated hedges (104,339 )
Transfer on ineffective portion to profit or loss 78
Amortization of hedges to profit or loss at the effective rate 3,325
Deferred taxes on hedge accounting 34,319
Balance in 2015 (108,059 )
(b.1) Interest rate fluctuation risk sensitivity
analysis
Management believes that the most significant risk related to
interest rate fluctuations arises from its liabilities associated
to the TJLP, the USD LIBOR, and mainly the CDI. This risk is
associated to an increase in those rates.
As at December 31, 2015, management estimated the fluctuation
scenarios of the rates CDI, TJLP and USD LIBOR. The rates used for
the probable scenario were the rates prevailing at the end of the
reporting period. These rates have been stressed by 25 and
50 percent, and used as benchmark for the possible and remote
scenarios. Important to consider that in the beginning of January
2015, the TJLP increased from 5.0% p.a. to 5.5% p.a., which was the
start of successive increases. For the quarter beginning April
2015, the TJLP increased to 6.0%, remaining at 6.5% in July and in
October 1-December 31, 2015 it increased to 7.0%.
Before the end of the first quarter of 2016, the National Monetary
Council had decided for a new increase for this rate, this time to
7.5% p.a., effective in January 1 - March 31, 2016.
2015
Interest rate
scenarios
Probable
scenario Possible scenario Remote scenario
CDI TJLP 6M USD LIBOR CDI TJLP 6M USD LIBOR CDI TJLP 6M USD
14.14 % 7.0 % 0.84615 % 17.68 % 8.8 % 1.05769 % 21.21 % 10.5 % 1.26923 %
As at December 31, 2015, management estimated the future outflows
for the payment of interest and principal of its debt associated to
CDI, TJLP, and USD LIBOR based on the interest rates above.
Such sensitivity analysis considers payment outflows in future
dates. Thus, the aggregate of the amounts for each scenario is not
equivalent to the fair values, or even the present values of these
liabilities. The fair values of these liabilities, should the
Company’s credit risk remain unchanged, would not be impacted
in the event of fluctuations in interest rates, as the interest
rates used to estimate future cash outflows would be the same rates
that discount such flows to present value.
The impacts of exposure to interest rates, in the sensitivity
scenarios estimated by the Company, are shown in the table
below:
2015
Transaction Individual risk Probable Possible Remote
CDI-indexed debt CDI increase 2,120,449 2,516,488 2,980,156
Derivative financial instruments (net position - CDI) CDI increase 10,669,673 13,047,050 15,566,283
TJLP-indexed debt TJLP increase 942,049 1,119,643 1,304,957
US$ LIBOR-indexed debt US$ LIBOR increase 562,123 660,468 715,699
Derivative instruments (net position - LIBOR) US$ LIBOR decrease (198,734 ) (211,566 ) (231,488 )
Total associated to interest rates 14,095,560 17,132,083 20,335,607
3.4.2. Credit risk
The concentration of credit risk associated to trade receivables is
immaterial due to the diversification of the portfolio. Doubtful
receivables are adequately covered by an allowance for doubtful
accounts.
Transactions with financial institutions (short-term investments
and borrowings and financing) are made with prime entities,
avoiding the concentration risk. The credit risk of financial
investments is assessed by setting caps for investment in the
counterparts, taking into consideration the ratings released by the
main international risk rating agencies for each one of such
counterparts. As at December 31, 2015, approximately 99.20% of
the consolidated short-term investments were made with
counterparties with an AAA, AA or sovereign risk rating.
The Company had credit risks related to dividends receivable
associated to the investment in Unitel (Note 26).
3.4.3. Liquidity risk
The liquidity risk also arises from the possibility of the Company
being unable to settle its liabilities on maturity dates and obtain
cash due to market liquidity restrictions.
During 2015, our operations generated negative cash flows of
R$1,054 million. As a result, we financed investing activities,
debt service and working capital from our cash and cash equivalents
and short-term cash investments. Historically, we have financed our
investments in property, plant and equipment through the use of
bank loans, vendor financing, capital markets and other forms of
financing.
As of December 31, 2015, our consolidated cash and cash equivalents
and short-term cash investments amounted to R$16,700 million and
our consolidated indebtedness amounted to R$ 59,857million. We
anticipated that we will be required to spend approximately
R$19,725 million to meet our short-term contractual obligations and
commitments during 2016, and an additional approximately R$30,672
million to meet our long-term contractual obligations and
commitments in 2017 and 2018.
On March 9, 2016, we announced that we had retained PJT Partners as
our financial advisor to assist us in evaluating financial and
strategic alternatives to optimize our liquidity and debt profile.
On April 25, 2016, we entered into a customary non-disclosure
agreement with Moelis & Company, who acts as advisor for a
diverse ad hoc group of holders of the bonds issued by Oi and its
subsidiaries, as an initial step towards discussions of a potential
restructuring of its indebtedness.
The following are the contractual maturities of the financial
liabilities, including estimated interest payments, where
applicable:
Less than One to Three Three to More than Total
(in millions
of reais )
Continuing operations:
Loans and financings (i) R$ 15,282 R$ 24,998 R$ 16,894 R$ 6,243 R$ 63,417
Debentures (ii) 1,622 4,170 17 — 5,809
Unconditional purchase obligations (iii) 1,477 758 343 — 2,578
Concession fees (iv) 288 306 348 1,437 2,379
Usage rights (v) 912 7 — — 919
Pension plan contributions (vi) 144 433 289 577 1,443
R$ 19,725 R$ 30,672 R$ 17,891 R$ 8,257 R$ 76,545
The amounts disclosed in the tables take into account the
contractual undiscounted payment outflow estimates, these amounts
are not reconciled with the amounts disclosed in the balance sheet
for borrowings and financing, derivative financial instruments, and
trade payables.
(i) Includes (1) estimated future
payments of interest on our loans and financings, calculated based
on interest rates and foreign exchange rates applicable at December
31, 2015 and assuming that all amortization payments and payments
at maturity on our loans and financings will be made on their
scheduled payment dates, and (2) estimated future cash flows on our
derivative obligations, calculated based on interest rates and
foreign exchange rates applicable as of December 31, 2015 and
assuming that all payments on our derivative obligations will be
made on their scheduled payment dates;
(ii) Includes estimated future payments of
interest on our debentures, calculated based on interest rates
applicable as of December 31, 2015 and assuming that all
amortization payments and payments at maturity on our debentures
will be made on their scheduled payment dates;
(iii) Consists of (1) obligations in
connection with a business process outsourcing agreement, and (2)
purchase obligations for network equipment pursuant to binding
obligations which include all significant terms, including fixed or
minimum quantities to be purchased; fixed, minimum or variable
price provisions; and the approximate timing of the
transaction;
(iv) Consists of estimated bi-annual fees
due to ANATEL under our concession agreements expiring in 2025.
These estimated amounts are calculated based on our results for the
year ended December 31, 2015;
(v) Consists of payments due to ANATEL
for radio frequency licenses. Includes accrued and unpaid interest
as of December 31, 2015; and
(vi) Consists of expected contributions to
amortize the actuarial deficit of the BrTPREV plan.
Capital management
The Company seeks to manage its equity structure according to best
market practices.
The objective of the Company’s capital management strategy is
to ensure that liquidity levels and financial leverage to allow the
sustained growth of the Group, the compliance with the strategic
investment plan, and generation of returns to our shareholders.
The Company may change its capital structure, according to existing
economic and financial conditions, to optimize its financial
leverage and debt management (Note 1).
The indicators commonly used to measure capital structure
management are: gross debt to accumulated twelve-month EBITDA
(earnings before interest (financial income and expenses), taxes,
depreciation and amortization, and other nonrecurring results), net
debt (gross debt less cash and cash equivalents and short-term
investments) to accumulated twelve-month EBITDA, and the interest
coverage ratio.
3.4.4. Risk of acceleration of maturity
of borrowings and financing
Under some debt instruments of the Company, default events can
trigger the accelerated maturity of other debt instruments. The
impossibility to incur in new debt might prevent the company from
investing in its business and incur in required or advisable
capital expenditures, which would reduce future sales and adversely
impact its profitability. Additionally, the funds necessa |
