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01 Dec 2009
Sao Paulo, December 01, 2009 -- Substitute paragraph 14 with the following:
" In accordance with Moody's methodology for government related
issuers, or GRIs, the Baa3 corporate family rating of CEMIG
reflects the combination of the following inputs:
- Baseline credit assessment (BCA) of 10 (mapping to a Baa3)
- High-level dependence
- Mid-level government support
- The Ba3 rating of the State of Minas Gerais, which has
a stable outlook."
Revised release follows.
Moody's confirms CEMIG GT and CEMIG D at Baa3; outlook negative
Approximately BRL 840 million of debt instruments affected
Moody's América Latina (Moody's) has today confirmed its Baa3 global
scale and Aa1.br Brazil national scale ratings for CEMIG GERAÇÃO
E TRANSMISSÃO S.A. (CEMIG GT) and CEMIG DISTRIBUIÇÃO
S.A (CEMIG D). At the same time, Moody's downgraded
to Ba1 from Baa3 on its global scale and from Aa1.br to Aa2.br
on the Brazil national scale the issuer rating of the holding company
Companhia Energética de Minas Gerais (CEMIG). The outlook
for all ratings is now negative. This action concludes the review
for downgrade initiated on April 24, 2009.
The rating action affected the following debt issues:
- BRL 238.8 million due 2011 guaranteed by CEMIG Baa3/ Aa1.br
- BRL 349.6 million due 2009 guaranteed by CEMIG Baa3/ Aa1.br
- BRL 250.5 million due 2014 guaranteed by CEMIG Baa3/ Aa1.br
The negative outlook reflects CEMIG's aggressive acquisition strategy
and its potential implications for CEMIG's leverage and liquidity,
in combination with CEMIG's relatively short term debt maturity profile.
While additional acquisitions would not necessarily cause a downgrade,
our analysis of the impact of future deals on consolidated leverage and
liquidity will be particularly important. The outlook is unlikely
to be stabilized until the company institutes financial policies that
provide for a stronger liquidity profile and capital structure without
ongoing near-term debt maturities.
CEMIG's issuer rating is one notch lower than the subsidiary issuer ratings
to reflect the material increase in structural subordination of any eventual
debt at the holding company level to that of the operating companies where
debt levels are expected to increase significantly. Lenders to
operating subsidiaries generally have claims on cash flow that are superior
to those of the holding company, which can also restrict the financial
flexibility of the holding company.
The Baa3 issuer ratings of CEMIG GT and CEMIG D reflect the overall investment
grade profile of CEMIG and its subsidiaries on a consolidated basis,
as together they have adequate credit metrics for the rating category,
a strong presence in the Brazilian electricity industry, experienced
management, recognized competitiveness and above average corporate
The ratings are constrained by the evolving Brazilian regulatory framework,
an aggressive capital expenditure and acquisition program, a relatively
high distribution pay-out ratio and the risks associated with the
potential political interference of the Government of the State of Minas
Gerais on CEMIG's business strategy.
CEMIG's announcement on April 24, 2009 that it was acquiring the
electricity transmission company Terna Participações S.A
(TERNA) prompted Moody's to place its ratings under review for possible
downgrade. At that time, Moody's stated its major concern
was the impact that such an acquisition would have on the company's capital
structure by increasing leverage and diminishing liquidity.
We expect that the acquisition will increase consolidated net debt by
around BRL 5 billion, of which BRL 3.5 billion represents
the cash disbursement amount to TERNA shareholders that will take place
by the beginning of November. CEMIG GT, the acquisition vehicle,
has a sizeable cash position of BRL 1.2 billion to partly meet
the purchase price with the balance to be raised in the local capital
markets with the issuance of BRL 2.7 billion in six-month
promissory notes. The company plans to refinance these notes at
maturity with long--term debt with tenors raging from 2
to 5 years.
CEMIG has the alternative to partially finance the TERNA acquisition through
a shareholding agreement with a group of institutional investors,
whereby CEMIG GT reduces its participation to 50% less one share
of the voting capital of TERNA and around 62% of its total capital.
This new shareholder is expected to contribute with around BRL 1.4
billion to the acquisition price. In addition to helping to finance
the deal, another objective of this arrangement is to allow TERNA
to remain a private company and thus eligible to receive long-term
funding from Brazilian federal and state-owned banks, such
as the BNDES. A secondary effect that is also important is that
it will leave CEMIG with more space for additional acquisitions,
as recently stated publicly by management.
Moody's understands that the TERNA acquisition should provide long-term
value to shareholders given potential synergy gains and the inherent stability
of the cash flow of the transmission business in Brazil. However,
Moody's expects that credit metrics will come under moderate pressure
because of the increased leverage from the deal and expects to see improvement
by year-end 2010.
Leverage measured by the ratio of consolidated Debt to EBITDA is likely
to move from the latest 3-year average of 2.3x to around
3.0x, while cash flow from operations (CFO) to debt is forecasted
to fall from the 3-year average 34% to the 23-27%
range within the next three years. However, cash interest
coverage (CFO + Interest over Interest) is expected to remain virtually
stable at 4.0x mainly stemming from the recent significant reduction
in local interest rates. These projections do not consider any
potential synergy gains and assume relatively conservative assumptions
for dividend distributions and capital expenditures. As a result,
credit metrics are expected to compare slightly unfavorably with the Baa3
Brazilian utility peer group, although metrics will remain strong
for the rating category compared to global peers.
The ratings could be downgraded if CEMIG continues to make sizable acquisitions
and fails to institute financial policies that provide for a stronger
liquidity profile and capital structure without ongoing near-term
debt maturities. The ratings could also be downgraded if retained
cash flow to total adjusted debt drops below 15% or interest coverage
is below 3.5x.
The ratings outlook could be stabilized if CEMIG institutes financial
policies that provide for a stronger liquidity profile and capital structure
without ongoing near-term debt maturities.
In accordance with Moody's methodology for government related issuers,
or GRIs, the Baa3 corporate family rating of CEMIG reflects the
combination of the following inputs:
- Baseline credit assessment (BCA) of 10 (mapping to a Baa3)
- High-level dependence
- Mid-level government support
- The Ba3 rating of the State of Minas Gerais, which has
a stable outlook.
CEMIG is a GRI as defined in Moody's rating methodology "The Application
of Joint Default Analysis to Government Related Issuers". Moody's
methodology for GRIs is to systematically incorporate into the rating
both the stand-alone credit risk profile or Baseline Credit Assessment
(BCA) of the company as well as an assessment of the likelihood that its
government owner would provide extraordinary support to the company's
obligations. The BCA of a GRI is expressed on a 1-21 scale
or as a range within the 1-21 scale, according to the issuer's
preference, where one represents the equivalent risk of an Aaa,
two a Aa1, three a Aa2 and so forth. Please refer to Moody's
special comments "Rating Government-Related Issuers in Americas
Corporate Finance" and "Government-Related Issuers: July
2006 Update" at moodys.com for additional information on GRIs.
The Aa1.br national scale rating assigned to the debentures reflects
the standing of the company's credit quality relative to its domestic
peers. Moody's National Scale Ratings (NSRs) are intended as relative
measures of creditworthiness among debt issuances and issuers within a
country, enabling market participants to better differentiate relative
risks. NSRs in Brazil are designated by the ".br" suffix.
Issuers or issues rated Aa1.br demonstrate very strong creditworthiness
relative to other domestic issuers. NSRs differ from global scale
ratings in that they are not globally comparable to the full universe
of Moody's rated entities, but only with other rated entities within
the same country.
The last rating action for CEMIG was on August 12, 2009 when Moody's
announced that it continued to review the ratings, which were placed
on review for possible downgrade on April 24, 2009.
The principal methodology used in rating CEMIG was the Regulated Electric
and Gas Utilities Rating Methodology (August 2009), which can be
found at www.moodys.com in the Credit Policy & Methodologies
directory, in the Ratings Methodologies subdirectory. Other
methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Credit Policy & Methodologies
Headquartered in Belo Horizonte, state of Minas Gerais, Companhia
Energética de Minas Gerais - CEMIG - is a public
holding company with interests in the generation, transmission and
distribution of electricity. The government of the state of Minas
Gerais holds 51% of its voting capital and 22% of its total
capital. CEMIG Geração e Transmissão S.A.
(CEMIG GT) and CEMIG Distribuição S.A. (CEMIG
D), are CEMIG's two main subsidiaries responsible for around 85%
of consolidated Net Sales and EBITDA. In 2008, CEMIG D sold
22.2TWh in the state of Minas Gerais and is Brazil's third largest
electricity distribution company. CEMIG GT is one of the largest
Brazilian electricity generation companies with an installed capacity
of 6.25GW. In the last twelve months ended June 30,
2009, CEMIG posted net consolidated sales of BRL 10,852 million
(USD 5,188 million) and net profit of BRL 1,658 million (USD
Asst Vice President - Analyst
Infrastructure Finance Group
Moody's America Latina Ltda.
Correction to text, October 16, 2009 Release: Moody's confirms CEMIG GT and CEMIG D at Baa3; outlook negative
William L. Hess
Infrastructure Finance Group
Moody's Investors Service
No Related Data.
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