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Rating Action:

Moody's assigns B1 ratings to Light SESA and Light Energia's proposed USD 600 million unsecured notes units due 2023

16 Apr 2018

New York, April 16, 2018 -- Moody's Investors Service ("Moody's") today has assigned a B1 global scale rating to the USD 600 million notes units consisting of senior unsecured notes (due 2023) to be issued at Light Serviços de Eletricidade S.A ("Light SESA") and Light Energia S.A ("Light Energia"). The proposed notes are guaranteed by the holding company Light S.A ("Light" or "the company") and proceeds from the issuance will be used to cover upcoming debt maturities. Light's B1/Baa1.br corporate family ratings (CFR) are unaffected. The ratings outlook is positive.

The assigned ratings are based on preliminary documentation received by Moody's as of the rating assignment date. Moody's does not expect changes to the documentation reviewed over this period nor does it anticipate changes in the main conditions that the debentures will carry. Should issuance conditions and/or final documentation of the debentures deviate from the original ones submitted and reviewed by the rating agency, Moody's will assess the impact that these differences may have on the ratings and act accordingly.

Assignments:

..Issuer: Light Servicos De Eletricidade S.A.

....Senior Unsecured Regular Bond/Debenture, Assigned B1

..Issuer: Light Energia S.A.

....Senior Unsecured Regular Bond/Debenture, Assigned B1

RATINGS RATIONALE

The proposed notes to be issued at Light SESA and Light Energia will be senior unsecured debt instruments and will be fully guaranteed by Light. The notes will be subordinated to secured debt instruments consisting of BNDES loans and a new BRL 1.4 billion FIDC working capital facility, both backed by receivables and together accounting for up to 34% of consolidated debt. Despite their junior ranking as unsecured debt instruments, Moody's has not differentiated the ratings of the proposed notes from the CFR, considering that the very small size of guaranteed payments relative to the company's monthly billings (around 2% to 4% of the monthly billing flow) and the limited acceleration rights attached to the secured debt would not materially reduce the recovery rate of the proposed notes at the benefit of secured debtholders in a distress scenario.

The debentures include standard debt acceleration clauses among which the non-payment by Light or any of its subsidiaries, of any financial obligation above BRL 30 million and change of control followed by a rating downgrade.

A clause also provides for the automatic substitution of Light Energia by Light SESA as obligor of the proposed notes upon a change in the control at/or sale of Light Energia and under certain conditions. Debt incurrence will be restricted to the company's ability to reach a reported Net debt to EBITDA below 3.5x. Dividend payments will be restricted to the company's ability to pass the debt incurrence test, and limited to 50% of net income and 100% of cash proceeds from the transfer or sale of assets. Restrictions do not apply to the 25% minimum dividend payout in accordance to Brazilian Corporate Law for public companies. While issued in US dollars the proposed notes will be fully hedged against foreign currency risk through the use of derivative arrangements.

The assigned B1 rating is in line with the Light's Corporate Family Rating (CFR) of B1/Baa1.br and reflects: (i) the positive trends that the company has shown in reducing non-technical losses, as illustrated by an additional 1093 GWh energy recovered in 2017 compared to 683 GWh in the 2016 and improvements in service quality indicators; (ii) the reduction in its financial leverage, as shown by a reported net debt to EBITDA of 3.1x as of December 2017 down from 3.7x in prior year, which is mainly driven by EBITDA growth following the fourth tariff review and concession contract amendments in 2017; and (iii) Moody's expectations that credit metrics will recover over the coming 12 to 18 months driven by consumption recovery and reduction in loss rates, although improvements will be held back in 2018 by bad debt provisions and the payment of regulatory costs related in the generation segment which are currently suspended under a legal dispute.

On the other hand the B1 rating incorporates: (i) the still high energy loss rates in the distribution segment, which were at 39% for low voltage non-technical losses in December 2017 and compares poorly to rated peers; (ii) weak economic conditions in Light's concession area, which will continue to challenge bad debt and cash flow conversion; and (iii) a short term debt maturity profile indicating high refinancing needs, which could be partially addressed upon successful conclusion of the company's on-going refinancing efforts.

The positive outlook reflects Moody's expectation that an improved operating performance and successful extension of the Light's debt maturity profile would result in stronger credit metrics and liquidity profile in the next 12 to 18 months.

Moody's views Light's liquidity profile as weak but evolving. As of 31 December 2017 the company had a consolidated cash position of BRL 342 million (including BRL 72 million of marketable securities), comparing to around BRL 2.5 billion of financial debt maturing in the next 12 months. Non-financial obligations also include around BRL 537 million as of December 2017 (BRL 342 net of receivables) in unpaid sector fees related to hydrology costs, which are currently blocked by a legal dispute the settlement of which is still uncertain. Since the beginning of the year the company has engaged in the refinancing of upcoming debt maturities, rolling over around BRL 730 million in bank loans coming due, announcing the issuance of a BRL 1.4 billion 6-year (including one year of payment holiday) working capital facility backed by receivables (FIDC), and of the proposed USD 600 million notes which is due in full (non-amortizing) in 2023. Upon completion, those two transactions alone will significantly extend Light's debt maturity profile and, together with other announced like for like debt refinancing, contribute to extend average debt maturity to 3.7 years from 2.6 years as reported in 2017.

WHAT COULD CHANGE THE RATING UP/DOWN

Growing cash flow generation and reduction in leverage resulting in sustained improvements in credit metrics such that CFO pre WC / Debt exceeds 15% and CFO pre WC Interest coverage reaches 3.0x could lead to an upgrade of the ratings. Light's ability to successfully execute its on-going refinancing plan and materially extend the average tenor of its debt maturity profile would also exert upward rating pressure.

In light of the positive outlook a rating downgrade is unlikely in the near term. A rating stabilization could result from a weakening of the company's metrics such that CFO pre WC interest coverage remains sustainably below 2.5x and/or CFO pre-WC to Debt remains below 14% on a sustainable basis.

Headquartered in Rio de Janeiro - Brazil, Light S.A is an integrated utility company with activities in generation, distribution and commercialization of electricity. In 2017 Light SA reported BRL10.7 billion in net revenues (excluding construction revenues) and close to BRL 2 billion in adjusted EBITDA respectively. Light S.A is ultimately controlled by Companhia Energetica de Minas Gerais ("CEMIG", rated B3/B2.br, stable), the company's major shareholder with a direct and indirect stake of 48.8% in Light S.A.

The principal methodologies used in rating Light Servicos De Eletricidade S.A. were Regulated Electric and Gas Utilities published in June 2017. The principal methodologies used in rating Light Energia S.A. were Unregulated Utilities and Unregulated Power Companies published in May 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1113601.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

Paco Debonnaire
AVP-Analyst
Financial Institutions Group
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 800 891 2518
Client Service: 1 212 553 1653

Michael J. Mulvaney
MD - Project Finance
Corporate 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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