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Rating Action:

Moody's affirms Eletrobras' Ba3 rating, outlook changed to positive

 The document has been translated in other languages

18 Sep 2019

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

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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