TIMS3 TIM SA

Brazil's Oi SA, a telecommunications company that recently filed the largest bankruptcy in the country's history, is seeking court protection in the U.S. to shield its assets from an affiliate of hedge fund Aurelius Capital Management LP, one of its holdout bondholders.

Oi and several affiliates sought chapter 15 protection—the section of the bankruptcy code that deals with international insolvencies—at the U.S. Bankruptcy Court in Manhattan on Tuesday, with a debt load of $19 billion. A day earlier, the troubled telecom firm filed for the equivalent of chapter 11 in Brazil after an out-of-court restructuring proposal collapsed.

If a judge approves Oi's chapter 15 request, the company would receive the benefits of U.S. bankruptcy law, which halt lawsuits and block creditors from seizing assets while it focuses on restructuring at home. Oi has dollar-denominated bonds and says many of its contracts and licenses, including those concerning undersea cables and satellite services, are governed by U.S. law.

Oi has been battling Capricorn Capital Ltd., the Aurelius affiliate, which has targeted the telecom giant in lawsuit in the Netherlands over €2.8 billion ($3.16 billion) in intercompany loans. Oi says chapter 15 protection will help it fend off any additional litigation from New York-based Aurelius and who may be looking to interfere in its restructuring efforts.

A spokesman for Aurelius declined to comment Wednesday.

"The threat of additional adverse actions by creditors and the need for a centralized forum to facilitate its reorganization compelled the company to begin preparations for a formal judicial restructuring," said Ojas N. Shah, whom Oi appointed as its foreign representative in its U.S. bankruptcy proceedings.

In court papers filed Tuesday, Oi blamed its financial woes on a "perfect storm of economic strain at the corporate, sector-wide, and national level." A deep recession in Brazil coupled with corruption scandals has hurt foreign investment and "generally crippled the Brazilian capital markets," according to Mr. Shah.

The company says it was caught off-guard by a rapid shift in demand away from so-called fixed-line telephone service to mobile, the more profitable segment of the telecommunications sector in Brazil. And regulations forced it to continue expanding its services into rural areas even as its revenue fell.

A planned merger with competitor TIM Participaç õ es SA, an arm of Telecom Italia, also fell apart.

Oi is Brazil's fourth-largest telecom company, with more than 74 million customers and 142,000 employees. The company's debt load largely stems from two mergers, first with Brasil Telecom in 2010 and later with Portuguese company Portugal Telecom, which ultimately failed to generate enough business to fund the company's investment needs.

Bayard Gontijo, Oi's chief executive, resigned June 10 under pressure from shareholders shaken by a debt-for-equity swap proposed by the company's creditors. The deal would have significantly diluted the company's shares, giving a 95% stake of the restructured business to its bondholders.

The negotiations involved Oi's main shareholder, Bratel BV, which controls a 22.24% stake in the company. Bratel is an investment vehicle formed by former shareholders of Portugal Telecom, using the official name Pharol SGPS. On the other side of the table, investment bank Moelis & Co. is advising creditors with around 40% of outstanding bonds, including big international players such as Pacific Investment Management Co., Citadel LLC and Wellington Management Co.

Rogerio Jelmayer and Luciana Magalhaes contributed to this article.

Write to Tom Corrigan at tom.corrigan@wsj.com

(END) Dow Jones Newswires

June 22, 2016 17:15 ET (21:15 GMT)

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