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04 Nov 2009
BRL550 million in debt securities affected
Sao Paulo, November 04, 2009 -- Moody's America Latina Ltda. (Moody's) has assigned
a BR-1 rating to BRL 550 million in 360-day promissory notes
issued by Terna Participações S.A. (Terna).
At the same time, Moody's has assigned long-term issuer
ratings to Terna of Baa3 on its global scale and Aa1.br on the
Brazilian National Scale. The outlook is negative
The ratings reflect Terna's strong credit metrics for the rating
category supported by stable and predictable cash flows provided by long-term
concession contracts for electricity transmission. The ratings
consider the evolving regulatory framework for transmission companies
in Brazil, which is supportive and well developed but is relatively
new and still untested. The rating is constrained by the uncertainties
over the aggressive expansion program that maybe carried out by its new
shareholder, with potential implications for its leverage and liquidity.
The rating also considers the structural subordination of debt at Terna's
holding company level to approximately BRL1.1 billion in guaranteed
debt at the level of its operating subsidiaries. The promissory
notes were issued by the holding company and do not benefit from upstream
guarantees from the operating subsidiaries.
The current issuance of BRL 550 million promissory notes was intended
to refinance an intercompany loan with its current parent, Terna
Rete Elettrica Nazionale S.p.A (Terna SpA, A2,
Stable), before the closing of the acquisition of 85.27%
of Terna's voting capital and 65.86% of its total
capital by Transmissora do Atlântico de Energia Elétrica
S.A. --TAESA, a special purpose company owned
by Cemig Geração e Transmissão (CEMIG GT, Baa3,
Negative) and other equity investors, which is expected by November
Moody's views the regulatory framework for transmission companies in Brazil
as well developed and highly supportive but some procedures are still
untested, such as the indemnification of non-depreciated
assets upon the non-renewal or termination of an existing concession.
The secure and stable nature of the transmission segment stems from the
Permitted Annual Revenues (RAP), which are based on fixed capacity
payments throughout the concession period that have provisions for automatic
annual adjustments for inflation. Moody's notes, however,
that the regulation for the transmission segment is evolving towards an
incentive-based model, similar to the regulation currently
in place for distribution companies. Terna operates eight transmission
networks under long-term concessions expiring between 2030 and
2038. The company largely benefits from a portfolio consisting
of concessions primarily granted before 2006 whose tariffs are not subject
to periodic reviews. On the other hand, the RAP of these
concessions is scheduled to step down 50% starting in 2016.
Terna has strong credit metrics for the rating category that are supported
by long term contracts for electricity transmission. Returns are
also enhanced by tax incentives that result in a reduced effective tax
rate, which Moody's estimate at approximately 22% on
average until 2013. Leverage as measured by Net Debt to Regulatory
Asset Value (RAV), adjusted in accordance with Moody's standard
adjustments, was 48% on average from 2006 through 2008,
while the interest coverage ratio (ICR) was 2.3x, and Funds
From Operations (FFO) to Net Debt was 26%. These metrics
are strong for the Baa3 rating category; however, these strong
metrics are partially offset by low Retained Cash Flow (RCF) to capital
expenditures of only 0.14x on average during this period.
The low RCF to capital expenditures is a combined result of the several
business acquisitions that took place from 2006 through 2008, including
the BRL 562 million paid for ETEO in 2008, and the relatively high
dividend payout ratio.
Going forward, Moody's expects Terna's leverage to remain
relatively stable at approximately 56% measured by Net Debt to
RAV with an ICR around 2.4x. The healthy ICR is supported
by the company's relatively low cost of funding influenced by subsidized
loans from the BNDES (equivalent to 63% total debt on June 30,
2009). FFO to Net Debt is expected to increase over the next few
years to the low 30% range as a result of margin improvements after
the termination of the Engineering Procurement and Construction (EPC)
agreement between Terna's subsidiaries TES (construction services)
and Brasnorte (transmission) in 2009 along with the continued strong operating
performance of Terna's other transmission subsidiaries. The
consolidated RAP from July 01, 2009 through June 30, 2010
was set at BRL 798 million. The risk of these projections is additional
acquisitions with possible implications on leverage and liquidity.
The negative outlook reflects the company's refinancing risk and
relatively weak debt maturity profile. Terna's liquidity position
has been historically constrained by its extensive capital investment
program and high dividend distribution. The liquidity position
will be further stretched over the next four quarters as a result of the
distribution of approximately BRL 300 million of dividends before the
closing of the acquisition by TAESA. While Moody's believes
that Terna will prudently manage capital expenditures and keep dividends
in line with available cash flow over the next twelve months, the
company will need to rely on access to the capital markets or support
from CEMIG GT and its other equity owners to address the October 2010
maturity of the BRL 550 million promissory notes.
The outlook is likely to be stabilized if the company successfully extends
its debt maturity profile by reducing its short-debt to a level
that is more compatible to its cash flow availability. A stabilization
of CEMIG GT's outlook would also be important for a stabilization
of the outlook at Terna.
The ratings could be downgraded if the company fails to extend its debt
maturity profile or if its financial and operating performance deteriorate
to the extent that the RCF to Capital expenditures drops below 1.0x
(2.97x - 2Q09LTM) and the ICR falls bellow 2.0x (2.1x
- 2Q09LTM) for an extended period of time.
Terna's Issuer Ratings take into account structural subordination
of current and future debt at the holding company level. The ratings
thereby reflect bondholders' distance from the operating subsidiaries'
cash flows, the size of current and anticipated future debt levels
to be carried by the operating entities and the possible negative consequences
of the regulatory ring-fencing applicable to the operating companies
for bondholders at Terna.
The Aa1.br national scale ratings reflect the standing of credit
quality relative to 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. 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
The BR-1 Brazil national scale short-term rating indicates
an issuer with above average creditworthiness and superior ability to
repay its short-term debt obligations relative to other Brazilian
issuers. The Baa3 rating on Moody's Global Local Currency Scale
compares the issuer to all other issuers in the world and addresses the
ability to meet obligations in local currency, incorporating all
Brazil risks, including the potential volatility of the Brazilian
The principal methodology used in rating Terna was Regulated Electric
and Gas Networks Rating Methodology (August 2009), which can be
found at www.moodys.com in the Rating Methodologies sub-directory
under the Research & Ratings tab. Other methodologies and factors
that may have been considered in the process of rating this issuer can
also be found in the Rating Methodologies sub-directory on Moody's
Terna Participações S.A. (Terna) is a holding
company that operates 3,712 km high voltage transmission lines through
five subsidiaries: Transmissora Sudeste Nordeste -- TSN,
Novatrans Energia, Empresa de Transmisão Alto Uruguai -
ETAU, Empresa de Transmissão de Energia do Oeste --
ETEO and Brasnorte. In the last twelve months ended June 30,
2009, Terna had consolidated net sales of BRL719 million (USD344
million) and net profit of BRL223 million (USD107 million). Terna's
transmission activities are regulated by the Brazilian Energy Authority
(ANEEL), an independent regulatory agency.
Asst Vice President - Analyst
Infrastructure Finance Group
Moody's America Latina Ltda.
Moody's assigns BR-1 rating to Terna's Promissory Notes
William L. Hess
Infrastructure Finance Group
Moody's Investors Service
No Related Data.
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