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March 10, 2008 |
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COMPANHIA ENERGETICA: Privatization Spurs Moody's Rating Review Moody's Investors Service placed Companhia Energetica de Sao Paulo's Ba3 corporate family rating under review with direction uncertain after the recent announcement by the state of Sao Paulo that the company will be fully privatized. At the same time, Moody's specified that the company's baseline credit assessment is 14 from a previous range of 14 to 16. These issues were affected by Moody's action: -- US$1.4 billion Unsubordinated Unsecured Medium-Term Notes Program -- US$300 million 10% Senior Unsecured Notes due 2011 issued under the MTN program -- US$220 million 9.25% Senior Unsecured Notes due 2013 issued under the MTN program -- BRL750 million 9.75% IPCA Linked Notes due 2015 issued under the MTN program Moody's rating action reflects the many uncertainties surrounding the recently announced privatization process including the creditworthiness of the new shareholders and the financial strategy to be adopted by the new management. While there is an expectation that the State of Sao Paulo, as part of the privatization process, will guarantee a portion of the existing debt along with a guarantee from the new shareholders in a similar amount, the quality of that external support is unknown at this time. In addition, Moody's will need to determine whether the company should continue to be treated as a government-related issuer and, if so, the level of implied government support that may exist. Companhia Energetica is currently a GRI as defined in Moody's rating methodology "The Application of Joint Default Analysis to Government Related Issuers". Moody's methodology for GRIs is to systematically incorporate into the rating both the stand-alone credit risk profile or Baseline Credit Assessment (BCA) of the company as well as an assessment of the likelihood that a government would provide extraordinary support to the company's obligations. The BCA of a GRI is expressed on a 1-21 scale or as a range within the 1-21 scale, according to the issuer's preference, where 1 represents the equivalent risk of an Aaa, 2 a Aa1, 3 a Aa2 and so forth. The company's ratings incorporate a BCA which is currently 14. Applying the joint-default analysis, Moody's says its corporate family rating results from a BCA of 14, the Ba2 rating of the State of Sao Paulo, and Moody's view of medium dependence, and a medium probability of extraordinary support from the controlling shareholder. Incorporating these new factors, the application of the default analysis indicates a Ba3 corporate family rating. The company's BCA of 14 reflects the steady improvement in credit metrics since the capitalization in mid-2006, marked by continuous debt reduction and an enhancement of the debt profile that is having a positive impact on liquidity. The improvement has been based on stable cash flows, which in turn are underpinned by long-term energy supply contracts in both regulated and unregulated markets. Also supporting cash flows and improved leverage have been lower local interest rates and gains from the appreciation of the local currency. The rating continues to be constrained by an exposure to currency devaluation and floating local interest rates. Also restraining the ratings are the company's relatively sizeable contingent liabilities and, to a lesser extent, risks associated with the renewal of concessions. Headquartered in Sao Paulo, Brazil, Companhia Energetica de Sao Paulo (BOVESPA: CESP3, CESP5 and CESP6) is the country's third largest power generator, majority owned by the State of Sao Paulo. It operates 6 hydroelectric plants with total installed capacity of 7,456 MW and 3,916 MW of assured energy. The company reported net revenues of BRL1,983 million in the last twelve months through Sept. 30, 2006. |
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