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Research Update:

Eletrobras 'BB+' Foreign And 'BBB-' Local Cur rency  Ratings  Affir med, Outlook Still Negative

 

 

Primary Credit Analyst:

Marcelo Schwarz, CFA, Sao Paulo +55 11 3039 9782; marcelo.schwarz@standardandpoors.com

 

Secondary Contact:

Vinicius Ferreira, Sao Paulo 55 (11) 3039-9763; vinicius.ferreira@standardandpoors.com

 

Table  Of Contents

_______________________________________________________

 

Overview

Rating Action

Rationale

Outlook

Ratings Score Snapshot Related

Criteria And Research Ratings

List

 

 

 

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DECEMBER 2, 2015

 

 

 

Research Update: Eletrobras 'BB+' Foreign And 'BBB-' Local Currency Ratings Affirmed, Outlook Still Negative

 

Eletrobras' SACP reflects the following:

·         Our view of its "satisfactory" business risk profile, based on our assessment of an adequate regulatory framework for the Brazilian electricity sector.

·         Eletrobras' strong market position and key role in the Brazilian electricity sector as the largest generation and transmission player and the manager of sector's funds, such as the Reserva de Reversão Global (RGR) and Conta de Desenvolvimento Energético (CDE).

·         Its "highly leveraged" financial risk profile. In our view, the Law 12,783/2013 had a severe impact on the company's financials due to the combined effect of higher requirements to absorb the generation scale factor (GSF) adjustment after it sold its energy capacity cushion in the power A-0 auction in April 2014 and the extended drought in the country, which has pushed up energy prices;

·         We revised our assessment of Eletrobras' liquidity to "adequate" from "strong." This reflects the company's large debt maturities over the next few quarters. The company continues to post sizeable cash position and it has access to the credit markets, especially public banks.

·         Our view that it has a "positive" capital structure, thanks to its ownership of publicly-listed equity shareholdings, in which Eletrobras has minority stakes. These holdings could be monetized for the payment of debt.

 

Our base case for 2015-2017 (unconsolidated figures) assumes:

·         Adjusted EBITDA margin of 30%-35%;

·         Slight recovery in funds from operations (FFO), although sizable interest expenses should keep limiting cash generation; and

·         Adjusted total debt, which excludes RGR liabilities, to remain in the R$20 billion – R$23 billion range.

 

Based on these assumptions, we arrive at the following credit measures for the next two years:

·         FFO to adjusted debt of 2.5%-5.0%; and

·         Adjusted debt to EBITDA of 6.0x-8.0x, which is in line with a "highly leveraged" financial risk profile.

 

Our analysis focuses on Eletrobras' unconsolidated figures because it's a holding company that acts as a financial vehicle for the electricity sector, and manages sector's funds.

 

On April 28, 2015, the company announced a delay in the release of its 20-F filing, because it intends to release more details about the potential impact of the "Lava Jato" corruption investigation of certain contracts, including one of its subsidiaries, Eletrobras Termonuclear S.A – Eletronuclear. Eletrobras engaged an independent entity to conduct an investigation and ensure transparency. As a result, the company recently obtained an additional filing extension from the U.S. Securities and Exchange Commission to May 18, 2016. Nevertheless, as the company released its 2014 audited financials to the domestic regulator, this doesn't constitute an event of default under its debt agreements.

 

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Research Update: Eletrobras 'BB+' Foreign And 'BBB-' Local Currency Ratings Affirmed, Outlook Still Negative

 

 

 

Liquidity

We revised our assessment on Eletrobras' liquidity to "adequate" from "strong," reflecting the sizeable maturities in the next few quarters. Still, cash position is significant, and sources of liquidity--including FFO and cash balances--will exceed uses by at least 1.2x in the next 12 months. Liquidity sources will continue to exceed uses even if EBITDA were to decline 30%.

 

Principal Liquidity Sources:

·         Cash and equivalents of R$4.9 billion as of Sept. 30, 2015.

 

Principal Liquidity Uses:

·         Short-term debt of about R$3.7 billion as of Sept. 30, 2015; and

·         Dividend payout of 25% of net income.

 

The company doesn't have financial covenants and has adequate access to the credit markets, especially with public banks.

Eletrobras is currently in the final stages of renewing its electric distribution concessions, and the conclusion should accelerate their privatization process. This is potentially positive for the company, considering not only the proceeds to be received, but also the reduction in its investments. The sale process of its 51% stake in distributor Celg Distribuição S.A. (not rated) is more advanced and we expect it to be completed in 2016, and a minimum total equity value of R$2.8 billion was determined.

 

 

 

Outlook

 

The negative outlook on the company mirrors that on the sovereign and reflects our expectation that Eletrobras will continue to play an essential role in Brazil's electricity sector, and will therefore continue to receive government support. Consequently, any rating action on the company will continue to

mirror those on the sovereign.

 

The negative outlook on the Federative Republic of Brazil reflects our view that there is a greater than one–in–three likelihood that we could lower our ratings in the next year.

 

 

 

Ratings  Score Snapshot

 

Corporate Credit Rating

Global Scale

Foreign Currency               BB+/Negative/--

Local Currency                 BBB-/Negative/--

 

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Research Update: Eletrobras 'BB+' Foreign And 'BBB-' Local Currency Ratings Affirmed, Outlook Still Negative

 

Business risk: Satisfactory

·      Country risk: Moderately high

·      Industry risk: Intermediate

·      Competitive position: Satisfactory

Financial risk: Highly Leveraged

·         Cash flow/Leverage: Highly Leveraged

Anchor: b+

Modifiers

·         Diversification/Portfolio effect: Neutral (no impact)

·         Capital structure: Positive (+1 notch)

·         Liquidity: Adequate (no impact)

·         Financial policy: Neutral (no impact)

·         Management and governance: Fair (no impact)

·         Comparable rating analysis: Neutral (no impact)

·         Stand-alone credit profile: bb-

 

Likelihood of government support: Almost Certain

 

 

 

Related Criteria And Research

 

Related Criteria

·         Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015

·         Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014

·         Criteria: Standard & Poor's National And Regional Scale Mapping Tables, Sept. 30, 2014

·         Criteria: National And Regional Scale Credit Ratings, Sept. 22, 2014

·         Key Credit Factors For The Unregulated Power And Gas Industry, March 28, 2014

·         Corporate Methodology, Nov. 19, 2013

·         Corporate Methodology: Ratios and Adjustments, Nov. 19, 2013

·         Key Credit Factors For The Regulated Utilities Industry, Nov. 19, 2013

 

Ratings  List

 

Ratings Affirmed

 

Eletrobras-Centrais Eletricas Brasileiras S.A.

Corporate Credit Rating

Foreign Currency                      BB+/Negative/--

Local Currency                        BBB-/Negative/--

Brazil National Scale                 --/--/brA-1+
Senior Unsecured                      BB+

 

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DECEMBER 2, 2015

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Research Update: Eletrobras 'BB+' Foreign And 'BBB-' Local Currency Ratings Affirmed, Outlook Still Negative

 

 

Eletrosul Centrais Eletricas S/A.

Short-Term Debt                        brA-1+

 

 

 

 

 

Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at www.spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.

 

 

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CENTRAIS ELÉTRICAS BRASILEIRAS S.A. - ELETROBRÁS
By:	/S/ Armando Casado de Araujo
	Armando Casado de Araujo Chief Financial and Investor Relation Officer