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Rating Action: Moody's downgrades Eletrobrás' USD 1,750 million bond to Ba2; outlook negative

Global Credit Research - 02 Jul 2015

Approximately USD 1,750 million of debt instruments affected

New York, July 02, 2015 -- Moody's Investor Services downgraded to Ba2 from Ba1 the rating on Centrais Elétricas Brasileiras SA (Eletrobras)' USD 1,750 million global bond that expires on October 21, 2021. At the same time, Moody's assigned a Ba2 corporate family rating to Eletrobras, withdrew its Ba1 issuer rating and lowered the company's baseline credit assessment (BCA) to b2 from b1. The outlook on all ratings has been changed to negative. This concludes the review for possible downgrade that commenced on May 21, 2015.

RATINGS RATIONALE

The primary drivers of the downgrade are the financial pressures and execution risk associated with Eletrobrás' ambitious capital expenditure program, weak internal cash generation and an expected deterioration in the company's liquidity position. More specifically, Moody's projections indicate that Eletrobrás will continue to post weak credit metrics over the next eighteen months. Financial performance as measured by funds from operations (FFO) will remain tepid and not enable the company to meaningfully decrease its high leverage, absent a major reduction in its current capital expenditure program or some sort of capital injection.

Starting in 2016, Eletrobrás will no longer be able to count on the extraordinary cash flow sources, i.e., indemnification payments, as it has done over the past two years, which is likely to put additional pressure on the company's liquidity and leverage.

The negative outlook reflects the uncertainties arising from potential energy rationing due to the current hydrological crisis should it continue well into 2016, which would lead to a further deterioration in the company's credit metrics; the failure of the company to file its 20F with the United States Securities Exchange Commission (SEC) which prompted a qualified opinion from its auditor KMPG with its 1st quarter financial results; the outcome of the investigation on potential bribery payments to the former CEO of the Eletronuclear subsidiary; delays and further potential cost overruns in connection with the company's new nuclear plant construction; and the company's need to raise additional funding on a timely and adequate basis to fund the balance of its aggressive capital expenditure program.

In accordance with Moody's methodology for Government Related Issuers, or GRIs, the Ba2 issuer rating of Eletrobrás reflects the combination of the following inputs:

- Baseline credit assessment (BCA) b2 - High-level dependence (70%) - High level of government support (71%-90%)

- The Baa2 rating of the Government of Brazil, which has a negative outlook.

What could change the rating up

In light of this rating action, an upgrade of the company's ratings is highly unlikely in the short-to-medium term.

What could change the rating down

Moody's would consider downgrading the ratings should the company's credit metrics deteriorate more than Moody's expects so that cash from operations before changes in working capital (CFO Pre WC) over debt ratio becomes lower than 5% and that interest coverage stays below 1.6x on a sustainable basis.

There would be additional pressure for a downgrade should Moody's perceive a pronounced deterioration of Eletrobrás' liquidity position, which could arise from the company's not filing the 20 F form at SEC within the granted 180-day period or having difficulties in securing timely long-term debt to meet its capital expenditure program notably for the construction of the 1.4GW nuclear power plant Angra III.

 

The downgrade of Brazil's sovereign rating or a negative change in our expectations regarding the government's support for the company could also trigger a downgrade rating action.

Eletrobrás' electricity generation has installed capacity of 44 GW, which is equivalent to 33% of Brazil's total generation installed capacity, including the 7 GW capacity of Itaipu. Eletrobrás' transmission lines above 230KV comprise 60,502 Km or around 48% of the country's total high voltage transmission lines. The distribution segment, largely consisting of small distribution companies in the North and Northeast portion of the country, sold 17.1 GWh or around 3% of the electricity consumed in Brazil in 2014.

Eletrobrás is also a financing vehicle with a consolidated portfolio of around BRL 15.9 billion in loans granted to a diverse range of Brazilian electricity companies, including USD 5.0 billion in loans to Itaipu. Eletrobrás is also the Federal Government's vehicle for managing the CDE (Energy Development Account), a specific fund of the Brazilian electricity industry, and certain social programs such as the "Light For All" aimed at extending electricity to the most remote regions of the country.

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in December 2013. Other methodologies used include the Government-Related Issuers published in October 2014. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The following information supplements Disclosure 10 ("Information Relating to Conflicts of Interest as required by Paragraph (a)(1)(ii)(J) of SEC Rule 17g-7") in the regulatory disclosures made at the ratings tab on the issuer/entity page on www.moodys.com for each credit rating:

Moody's was not paid for services other than determining a credit rating in the most recently ended fiscal year by the person that paid Moody's to determine this credit rating.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jose Soares
VP - Senior Credit Officer
Infrastructure Finance Group
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601

 

Sao Paulo, SP 04578-903
Brazil
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William L. Hess
MD - Utilities
Infrastructure Finance Group
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SUBSCRIBERS: 212-553-1653

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