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Electric Sector Legislation | Doomsday for Debentures?

BRAZIL — While sentencing in the «big monthly payola scandal» and an upcoming vote on the «Constitution of the Internet» monopolize the headlines, Provisional Measure 579, currently under debate by the Brazilian congress,

addresses concessions for the generation, transmissions and distribution of electrical energy, as well as the reduction of taxes on the electrical sector, the price to the consumer, and other provisions.

According to today’s Folha de S. Paulo,

members of the government benches in Congress are contemplating an amendment  under which MP 579 would apply only to electric companies that have already had their concessions renewed.

The lack of definition may be affecting the credit-worthiness of major players in the sector, as Valor explained on Monday –Source: Portal ClippingMP..

Faced with uncertainty in the process of renewing electrical energy concessions, Eletrobras has decided to delay plans to raise BRL 2 billion in the capital markets with a debenture issue. The state-owned utility is the latest in a series of electricity companies with fundraising plans affected by the federal government’s plan to reduce retail energy prices. In September, Eletropaulo was obliged to raise interest rate yields in order to place a BRL 750 million debenture issue.

Last Friday, at a seminar on the issue organized by the National Confederation of Industries (CNI) and the Brazilian Association of Infrastructure and Basic Industries (ABDIB), senior government officials offered assurances that there would be no interruption of investments under 579 and defended the legality of the executive provisional measure.

In September, as the measures were announced, Eletropaulo, which distributes energy to the metro São Paulo region, was obliged to raise interest rates paid to investors in order to carry out a debentures issue worth BRL 750 million. The change came as underwriters of the issue invoked a contractual clause known as “market flex,” which permits the adjustment of interest rates in the event that market conditions worsen.

In the case of Eletrobras, the decision to delay the issue was the company’s, as Valor discovered. Unlike the Eletropaulo case, the Eletrobras deal lacked the so-called “firm guarantee” — a commitment by the underwriters to acquire paper for which there is no investor demand. Santander and BTG Pactual are the coordinators of the issue in question. Sought for comment, Eletrobras said it could not comment because it is in a quiet period.

Experts single out Eletrobras as the company most affected by conditions imposed on the renovation of concession contracts. The perception is that Eletrobras executives had a difficult time explaining to potential investors in its debentures what its operational indices would be and what its cash flows would look like after the changes mandated by the government.  As one executive put it, the “road show” would have been an “embarassment” to the company.

Companies in the electricity sector are the most frequent issuers of debt in the Brazilian capital markets. Along with the effect on debenture issues, uncertainties about the renewal of concessions has obliged such companies as CPFL to delay their IPOs.

Despite the uproar in the electricity sector, however, Eletrobras is in a good position to carry out the issue, market sources say. Despite the doubts hovering over the operational issues, the bank’s risk profile is viewed as comparable with Brazil’s sovereign risk.  That is to say, investors believe the government will support the company if cash flow problems arise that might make it difficult to fulfill its obligations to creditors.

One sign that Electrbras’ credit risk has not been affected is the performance of its debt paper in foreign markets. The most liquid issues, maturing in 2021, are trading at below face value.

Eletrobras had planned to use the capital raised with debentures to finance its consolidated investment plan for 2012-2013, on the order of BRL 5.6 billion. The coordination of the issue was the most hotly disputed of the year among investment banks. In order to best the offers of other banks, Santander and BTG Pactual agreed to charge a commission of only BRL 0.01 per share.

Although the Eletrobras issue remains on hold, debentures issues in general should grow at a healthy pace this year. Between January and October, debentures raised BRL 68.7 billion, an increase of 66.3% over the same period in the preceding year. according to data collected by Anbima.

On the Contrary: ELET3, ELET6 and Transmissão Paulista

At 11h27 Brasília time ELET3 ordinary shares were trading down 4.81%, at  R$ 9.30. At the same time, ELET6 led the list of losing issues on the  Ibovespa down 5.59%, at R$ 12.84. For comparison’s sake, the leading benchmark of the Brazilian capital markets was down 0.30% at the same time. –Source: Infomoney

CTEEP and Transmissão Paulista are two links in the value chain crying foul over the pending legislation.

Transmissão Paulista and other energy sector players see themselves as victims of the rules established by MP 579

The company called on shareholders to reject the terms of MP 579 during their publication of its third quarter results, which indicated BRL 241.33 million, down 30% from the same quarter in 2011. The company also disclosed net income down 10.1%, to BRL 806 million, with Ebitda down 9.8% to  R$ 459.7 million.

Transmissão Paulista and other companies say they are unduly burdened with a set of rules that could potentially hurt its bottom line. The market has taken these uncertainties into account and has reflected them since September 11, when the measure was announced. TRPL4 shares are down 42.80% year to date.