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Rating Action:

Moody's downgrades the issuer ratings of Light S.A and its subsidiaries to B1/Baa3.br and B1/Baa2.br from Ba3/A3.br, outlook remains negative

 The document has been translated in other languages

Global Credit Research - 21 Jul 2016

Sao Paulo, July 21, 2016 -- Moody's America Latina Ltda. ("Moody's") downgraded the Corporate Family Rating of Light S.A ("the company") to B1 from Ba3 on the global scale, and to Baa3.br from A3.br on the national scale. At the same time the agency downgraded the issuer ratings and senior unsecured debentures ratings of its fully owned subsidiaries Light Serviços de Eletricidade S.A.'s ("Light SESA") and Light Energia S.A ("Light Energia") to B1/Baa3.br from Ba3/A3.br and to B1/Baa2.br from Ba3/A3.br respectively. The outlook remains negative for all ratings.

RATINGS RATIONALE

The downgrade of the ratings of Light S.A, Light SESA and Light Energia and the negative outlook reflect : (i) higher uncertainties surrounding Light S.A's ability to comply with its financial covenants in the next 12 months as its required Net Debt to EBITDA ratio drops to 3.75x in December 2016 from 4.0x in September and 4.25x in June, (ii) the company's weakening credit metrics evidenced by a CFO pre WC to Debt of 15.4% in the LTM to March 2016 compared to 16.6% and 38.9% in 2015 and 2014 respectively, (iii) expectations that Light's cash flow generation will deteriorate in the next 12 to 18 months in the absence of a asset sales and/or favorable decision from the regulator on Light S.A's request for an extraordinary tariff review this November, and (iv) weaker operating profile compared to peers, characterized by higher non-technical losses, challenging Light SESA's ability to obtain future tariff reviews from the regulator.

On the other hand the ratings are supported by (i) Light S.A's large market share and strategic position within the Rio de Janeiro region, (ii) relatively resilient consumption levels in Light S.A's area of operations which saw a modest 0.4% growth in Q2 2016 (-4% over the first six months of 2016), on the back of the upcoming Olympic Games, (iii) improved cash flow generation in 2016 on the back of the November 2015 tariff adjustment and favorable exchange rates development, (iv) our expectations that Light S.A will maintain unrestricted access to the capital markets and will continue to be supported by its creditors should the company enter into a new round of covenant renegotiations going forward; and (v) the positive contribution from the more stable cash flow stream coming from the power generation assets (Light Energia).

The B1/Baa2.br ratings for Light Energia also reflect the more stable and predictable cash flow profile of Light S.A's generation assets compared to the distribution assets, after the hydrology risk has considerably receded from the last two years.

Moody's views Light S.A's liquidity profile as weak. As of 31 March 2016 Light S.A had a consolidated cash position of BRL 715 million (including BRL 70 million of marketable securities), and around BRL 2 billion of financial debt maturing in the next 12 months. During 2016 Moody's expects the company will generate positive free cash flows mainly supported by the release of regulatory assets driven by the November 2015 tariff increase and the favorable effects of a stronger domestic currency since the beginning of the year. The agency anticipates that this trend will reverse from 2017 however, due to an expected reduction in tariff after the November 2016 tariff adjustment, leading Light S.A to generate negative free cash flow in the coming years. This will leave the company to increasingly rely on external funding to refinance its coming debt maturities.

Given the rapid ratcheting down of the required Net debt to EBITDA to reach 3.75x in December 2016 from 4.0x in September and 4.25x in June under the company's covenant schedule, Moody's would not exclude a breach of covenants in the next 18 months which would materialize should the company miss the covenant ratio for two consecutive quarters. However the agency believes that under such circumstance Light SA's debenture holders, made of long dated relationship banks, would not use such credit event to accelerate the debt but instead seek to renegotiate a waiver for an additional fee.

WHAT COULD CHANGE THE RATING UP/DOWN

In light of the current rating action and the negative outlook, an upgrade of the rating is unlikely in the near term. The outlook could be stabilized should the company demonstrate visible improvements in its operating performance such that CFO pre WC interest coverage remains above 2.0x and/or CFO pre WC to debt stays above 10% on a sustained basis.

Light S.A's ratings could be downgraded as a result of a deterioration in the company's liquidity profile resulting from challenges in refinancing its debt obligations and/or a breach in its financial covenants that results in a material debt acceleration risk. The ratings could also be downgraded in the event of worsening consumption levels and/or negative tariff developments leading to a deterioration in the company's metrics such that CFO pre WC interest coverage remains below 1.0x and/or CFO pre-WC to Debt remains negative on a sustained basis.

The principal methodology used in rating Light Energia S.A was Unregulated Utilities and Unregulated Power Companies published in October 2014. The principal methodology used in rating Light Servicos De Eletricidade S.A. and Light S.A. was Regulated Electric and Gas Utilities published in December 2013. Please see the Ratings Methodologies page on www.moodys.com.br for a copy of these methodologies.

Headquartered in Rio de Janeiro - Brazil, Light S.A is an integrated utility company with activities in generation, distribution and commercialization of electricity. In the twelve months ended 30 March 2016 Light SA reported BRL9 billion in net revenues (excluding construction revenues) and close to BRL 1.1 billion in EBITDA respectively.

Light S.A is ultimately controlled by Companhia Energetica de Minas Gerais ("CEMIG", rated B1/Baa1.br, negative), the company's major shareholder with a direct 26.1% and a 32.5% stake, respectively, in Light S.A

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.

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 see the special report "Services provided to entities rated by Moody's America Latina Ltda." on our website www.moodys.com.br for further 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. Please go to www.moodys.com.br for a list of entities receiving products/services from these related entities and the products/services received. This list is updated on a quarterly basis.

The date of the last Credit Rating Action for Light Energia S.A. was 9/5/2016

The date of the last Credit Rating Action for Light Servicos De Eletricidade S.A. was 9/5/2016

The date of the last Credit Rating Action for Light S.A. was 9/5/2016

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

James Hempstead
Associate Managing Director
Infrastructure 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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