New York, September 18, 2019 -- Moody's Investors Service ("Moody's") has today
affirmed the Ba3 rating of Centrais Eletricas Brasileiras SA-Eletrobras,
including the company's senior unsecured debt and corporate family rating
(CFR). At the same time, Moody's affirmed the company's
baseline credit assessment (BCA) at b1. The outlook for all ratings
was changed to positive from stable.
Affirmations:
..Issuer: Centrais Eletricas Brasileiras SA-Eletrobras
...Corporate family rating (CFR), Affirmed
at Ba3
...$1750M Senior Unsecured Global Notes due
2021, Affirmed at Ba3
Outlook Action
..Issuer: Centrais Eletricas Brasileiras SA-Eletrobras
...Outlook: Changed to Positive from Stable
RATINGS RATIONALE
The change in Eletrobras' ratings outlook to positive reflect the
ongoing progress of the company's multi-year business plan
to enhance internal controls and improve profitability, including
the divesture of non-core assets such as the sale of Amazonas Distribuidora
de Energia (Amazonas D) in April, and the increasing diversification
of its funding base, evidenced by the refinancing of U$1.0
billion notes in July with long-term debentures issued in local
currency. Importantly, Moody's anticipates that such
trends will continue sustaining a gradual improvement in Eletrobras' credit
profile, as the company undertakes a number of additional efficiencies
improving actions and governance developments over the next 12-18
months.
Eletrobras' Ba3 rating incorporates a notch uplift from its stand-alone
credit profile, based on Moody's joint default analysis for the
company as a government-related issuer. This rating approach
incorporates Moody's views on the credit profile of the Government
of Brazil (Ba2 stable), as well as our view on the high level of
credit dependence between the two entities and a moderate probability
of the government providing extraordinary support to the company in case
of need.
Eletrobras b1 BCA reflects the company's credit profile on a stand-alone
basis without the government's support considerations. This assessment
considers the company's dominant position in the Brazilian electricity
market, accounting for 30% of the country's generation
capacity and 47% of the installed transmission lines, along
with its strategic role for regional economic development given the participation
in most of the country's relevant energy projects. The company's
high leverage and large contingent liabilities constrain this assessment,
as does the execution risk associated to its significant investment plan
through 2023.
In the 12 months ended June 30, 2019, Eletrobras reported
adjusted net revenues of BRL22.6 billion, for which we calculate
an adjusted EBITDA margin of 40.1%, compared to 20.5%
in 2017. The successful sale of unprofitable businesses,
along with other initiatives to improve efficiency gains, will likely
sustain a gradual improvement in the company's recurring EBITDA,
which we estimate in range of BRL8.8 to BRL9.5 billion over
the next 12 months. Further supporting the company's operating
cash generation are the compensation revenues of the transmission concessions
renewed in 2013, in the amount of approximately BRL3.5 billion
per year that the company is collecting since mid-2017 and until
2024.
On the other hand, a high debt burden continues to strain Eletrobras
credit profile. Following recent refinancing activities Moody's-adjusted
debt for Eletrobras reached BRL55 billion, which includes BRL11.5
billion in past due obligations with suppliers, mainly with Petroleo
Brasileiro S.A. - PETROBRAS (Ba2, stable),
that remained with the company following the sale of its distribution
assets. Part of those liabilities are covered by regulatory claims
and reimbursement from sector charges, but the exact credit amount
and the timing for compensation depends on regulatory approval.
Total adjusted debt also includes BRL4.2 billion in liabilities
related to the Global Reversal Reserve (RGR), BRL2.8 billion
in pension liabilities and BRL220 million in refinanced taxes.
Additionally, Eletrobras is exposed to several claims and legal
disputes, of which the most relevant is associated to reimbursements
of compulsory sector loans charged to industrial clients during the 1980's.
As of June 2019, the company recorded BRL25 billion in provisions
for probable losses, of which BRL865 million likely due in the next
12 months. Eletrobras' also reported BRL33.6 billion
in off-balance sheet obligations, related to corporate guarantees
provided to project debt issuances of non-consolidated subsidiaries.
Although not included in Moody's-adjusted leverage metrics,
the prospective impact of those liabilities was considered to our analysis
of the company's liquidity and future cash flows.
Moody's-adjusted net debt/EBITDA ratio for Eletrobras will likely
reach 6.3x by year-end 2019, up from 5.3x in
December 2018. The positive outlook on the ratings incorporate
a gradual improvement in the adjusted net debt/EBITDA ratio to 5.0x
over the next four years. In terms of cash flow metrics,
Moody's anticipates cash flow from operations pre-working
capital (CFO pre-WC) to net debt to deteriorate in 2019,
followed by an improvement to 6%-9% through 2022,
with cash interest coverage in the range of 1.5x to 2.0x
over the same period. The company's leverage could improve earlier
than anticipated if Eletrobras effectively receives all the regulatory
credits or if there is an equity capitalization model to support the company's
investment plan.
Eletrobras' liquidity position is currently adequate. Moody's
expects the company's operating cash generation enough to cover
mandatory cash obligations and maintenance capital expenditures of its
existing assets in the next 12-18 months. In recent years,
a low investment rate and the asset divestiture program helped to alleviate
the pressure on liquidity. But, the company's multi-year
business plan considers a much larger investment pace, which will
require incremental external sources of cash that will limit its deleveraging
pace. The company's 2019-2023 budget considers BRL30.2
billion in total capital investments, of which 40% is related
to the construction work for completing Angra 3, a 1.4 gigawatt
nuclear power plant.
The government has a plan to dilute its participation in Eletrobras through
an equity offering that may also provide the company additional resources
to support its investment strategy, however the terms and conditions
for this capitalization plan remain uncertain. A privatization
will lead us to reassess the assumptions on the dependence and support
levels to Eletrobras rating, based on the expected governance under
the new ownership structure. A change of control would also entail
significant execution risks, as related to contract renegotiations
and adjustments in the concession framework. Hence, any potential
benefits of the privatization have not been incorporated into Eletrobras'
ratings at this time.
WHAT COULD CHANGE THE RATINGS UP/DOWN
A rating upgrade will be considered with a sustained trend of stronger
cash generation within the existing businesses or the perception of further
improvement in the company's financial profile. A material
reduction of the uncertainties around the company's contingent liabilities
and more visibility on the funding to support its investment strategy
may also prompt an upgrade of Eletrobras' ratings. Quantitatively,
the company's BCA could be upgraded if: the Cash Flow (CFO)
pre-WC to net debt ratio exceeds 7% (5.2%
as of June 30, 2019), and the Interest Coverage Ratio moves
above 1.8x (1.4x as of June 30, 2019) on a sustainable
basis. A rating upgrade would also be considered if there is an
upgrade on the sovereign rating.
Negative rating pressure is unlikely in the near term, but it could
result from a rapid deterioration in the company's liquidity profile resulting
from unexpected large cash outlays or deterioration in its operating performance.
Moody's would consider a downgrade if such pressures were not mitigated
by an extraordinary financial support from its shareholders or resources
from upcoming asset sales. A weakened Moody's perception
on the support of the regulatory framework could also prompt a downward
action, as well as deterioration in the sovereign's credit quality.
Quantitatively, the company's BCA could be downgraded if:
the CFO pre-WC to total net debt ratio falls below 5%,
or the Interest Coverage Ratio decreases below 1.2x for two consecutive
periods.
Headquartered in Rio de Janeiro, Eletrobras is a holding company
controlled by Brazil's federal government with 51% of Eletrobras'
voting capital and 41% of its total capital. Eletrobras
is the country's largest generation and transmission company.
In the last twelve months ended June 30 2019, the company's
adjusted net revenues reached BRL22.6 billion.
The methodologies used in these ratings were Unregulated Utilities and
Unregulated Power Companies published in May 2017, and Government-Related
Issuers published in June 2018. Please see the Rating Methodologies
page on www.moodys.com for a copy of these methodologies.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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 credit rating action on the
support provider and in relation to each particular credit 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 credit rating action,
and whose ratings may change as a result of this credit 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.
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.
Cristiane Spercel
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 0 800 891 2518
Client Service: 1 212 553 1653
Michael J. Mulvaney
MD - Project Finance
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
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