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Rating Action:

Moody's assigns B1/Baa1.br rating to CEMIG GT's BRL 2.24 billion debentures due in 2021; outlook negative

 The document has been translated in other languages

Global Credit Research - 28 Dec 2016

Sao Paulo, December 28, 2016 -- Moody's America Latina Ltda. (Moody's) has assigned a B1 global scale rating and a Baa1.br national scale rating to the BRL2.24 billion senior secured debentures due in 2021, to be issued by Cemig Geracao e Transmissao S.A.("Cemig GT", or "the company"). Proceeds from the issuance will be used to repay existing debt outstanding. Cemig GT's B1/Baa1.br corporate family ratings (CFR) are unaffected. The outlook for the ratings is negative.

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.

RATINGS RATIONALE

The B1/Baa1.br ratings for the proposed BRL 2.24 billion debentures due 2021 reflect : (i) Cemig GT's weakening credit metrics driven by the loss of significant generation capacity, the impact of the economic recession and high borrowing costs evidenced by Moody's adjusted cash flow from operations (CFO) interest coverage and CFO-to-Debt dropping to 1.8x and 9.4% respectively in the twelve months ended 30 September 2016 from 3.5x and 25.8% in FY2015, (ii) weak liquidity reflected in the high portion of debt maturing in the next two years (51% of debt outstanding following the transaction) and expectations that the company will generate negative free cash flow until 2018, (iii) high leverage at Cemig GT's parent level Companhia Energetica de Minas Gerais ("CEMIG"), on a consolidated basis with a Net Debt to EBITDA of 4.5x reported in September 2016, and (iv) rising risk of interference from CEMIG's majority shareholder the state of Minas Gerais (B1 negative) given its financial position.

The assigned ratings also take into consideration : (i) Cemig GT's solid market positioning and diversity of operations within the generation and transmission segments, (ii) expectations that hydrology conditions and a more supportive regulatory environment will drive a more benign cost environment for the hydropower generation assets going forward, (iii) the significant value of assets and equity participation at both Cemig GT and CEMIG's levels which supports the group's asset sale strategy, and (iv) a relatively good access to debt and capital market evidenced by a track record of successful debt refinancing, although at higher costs recently.

The proposed debentures will be fully guaranteed by CEMIG and secured by a variety of assets including (i) receivables from the company's sale of energy supply for a minimum of BRL 300 million, (ii) concession rights relative to the 18 hydro plants concessions (which accounts for 10.3% of Cemig GT's total installed capacity) that the company won at an auction in December 2015, and (iii) pledge of shares of the companies that run the abovementioned 18 hydro plants. To the extent that the value those assets does not cover at least 120% of the outstanding amount of the debentures the company will be required to complement the collateral by choosing from (iv) pledge of shares of CEMIG's participation in unlisted companies Companhia de Gas de Minas Gerais (up to 49%), Aliança Geraçao de Energia S.A (45%) and in the hydro project under construction Santo Antonio Energia S.A (18%), as well was from (v) rights to receive future compensation from the regulator to account for unamortized investments on transmission concessions. The value of the collateral will be assessed on an annual basis from December 2016, and a bi-annual basis from December 2018 onwards.

Despite the secured nature of the debentures, Moody's has not differentiated the ratings of the 2021 debentures from those of the company's other obligations due to uncertainties related to the limited liquidity of certain assets and ultimate value that might be realized in the event of default. In Moody's view, the annual verification of the 120% collateral coverage leaves room for a sudden reduction in the value of securitized assets and the recovery rate in a distress scenario. The agency also notes that Cemig GT has 90 days following issuance of the debentures to constitute such collateral and that the mechanism over the transfer of rights to creditors as described by the indentures is yet to be defined at a later stage in a separate agreement.

The debentures include standard debt acceleration clauses among which the non-payment by Cemig GT or CEMIG of any financial obligation above BRL 100 million, change of the company's control and the termination of concession contracts, with the exception of Sao Simao, Jaguara and Miranda. The debentures also include financial covenants consisting of a Net Debt to EBITDA ratio (including dividend payments from subsidiaries and cash payments from the compensation of unamortized transmission assets) set at 5.5x starting in June 2017 and ratcheting down every year to reach 2.5x in June 2021 for Cemig GT, and at 4.5x in June 2017 gradually declining to 2.5x in June 2021 for CEMIG on a consolidated basis.

Moody's views Cemig GT's liquidity profile as weak. While the proceeds from the transaction will be entirely used to refinance existing debt obligations coming due in Q4 2016, and therefore lengthen the company's amortization schedule, the company will face BRL3 billion of other debt maturities during 2017, which compares to a cash & cash equivalents position of only BRL588 million (including cash and short-term investments) as of 30 September 2016.

Moody's anticipates that the company will generate negative free cash flow in 2017, driven by the on-going weakening of operating performance and by the dividend contribution expected to be upstreamed by the company to support CEMIG's plan to payout the put option relative to shares of the distribution company Light S.A (B1/Baa3.br, negative) in 2017. The negative free cash flow will leave the company to rely mainly on debt refinancing and on potential asset sales to service its debt in the next 12-18 months. Like most Brazilian companies, Cemig GT does not have committed stand-by liquidity facilities to meet unexpected cash outlays in the short term. While Cemig GT has a successful track record in raising financing in the local capital markets as well as securing short-term bank financing when needed, Moody's expects the extension of its debt maturity profile will increasingly depend on the its ability to diversify its funding pool and offer guarantees. In that regard Moody's notes that 40% of proceeds derived from future cross-border bond issuances by Cemig GT and asset sales made by Cemig GT or by its parent company CEMIG, will be used to pre-pay the 2021 debentures.

Rating Outlook

The negative outlook reflects Moody's expectations that the deterioration of operating performance and negative free cash flow generation will continue to put negative pressure on the company's liquidity profile over the next 12 to 18 months.

What Could change the rating Up/Down

In light of the negative outlook, an upgrade of the ratings is unlikely in the near term. A stabilization of the outlook could be considered upon visible improvements in Cemig GT's liquidity profile, and operating performance such that cash flow interest coverage ratio exceeds 3.0x, and CFO-to- debt remains above 20% on a sustainable basis.

Further deterioration in Cemig GT's liquidity profile such that Cemig GT face challenges in extending the average tenor of its debt maturity profile, either with internally generated cash flows or via alternative sources of funding could lead to a downgrade of the assigned debentures ratings. Negative pressure could also arise upon a breach of financial covenants as stated under the 2021 debentures, and/or evidence of cash flow impact resulting from interference with the majority shareholder the state government of Minas Gerais would also exert negative pressure on the ratings

Headquartered in Belo Horizonte, the capital city of the state of Minas Gerais, Cemig GT is a leading Brazilian integrated utility operating in the sectors of electricity generation and transmission, with total installed capacity of 6,819 MW and 4,926km of transmission lines across the country. In the last twelve months ended on September 30, 2016, CEMIG GT reported net revenues and EBITDA of BRL 6,8 billion and BRL 2.6 billion respectively.

The principal methodology used in this rating was Unregulated Utilities and Unregulated Power Companies published in October 2014. Please see the Rating Methodologies page on www.moodys.com.br for a copy of this methodology.

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_189530.

REGULATORY DISCLOSURES

Information sources used to prepare the rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's information.

Information types used to prepare the rating are the following: financial data, debt documentations, legislation, by-laws and legal documents, operating data, and historical performance data.

Sources of Public Information: Moody's considers public information from many third party sources as part of the rating process. These sources may include, but are not limited to, the list available in the link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_193459.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Please see the ratings disclosure page on www.moodys.com.br for general disclosure on potential conflicts of interests.

Moody's America Latina Ltda. may have provided Other Permissible Service(s) to the rated entity or its related third parties within the 12 months preceding the credit rating action. Please go to the report "Ancillary or Other Permissible Services Provided to Entities Rated by Moody's America Latina Ltda." in the link https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_193483 for detailed information.

Entities rated by Moody's America Latina Ltda. and the rated entities' related parties may also receive products/services provided by parties related to Moody's America Latina Ltda. engaging in credit ratings activities within the 12 months preceding the credit rating action. Please go to the link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_193481 for a list of entities receiving products/services from these related entities and the products/services received.

The date of the last Credit Rating Action was 5/7/2016

Moody's ratings are constantly monitored, unless designated as point-in-time ratings in the initial press release. All Moody's ratings are reviewed at least once during every 12-month period.

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.br.

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.

Please see ratings tab on the issuer/entity page on www.moodys.com.br for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com.br for further information.

Please see Moody's Rating Symbols and Definitions on the Ratings Definitions page on www.moodys.com.br for further information on the meaning of each rating category and the definition of default and recovery.

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.br 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.br for additional regulatory disclosures for each credit rating.

Paco Debonnaire
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: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

Michael J. Mulvaney
MD - Project Finance
Project Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

No Related Data.
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