BNDES, AES ratify US$1.2bn debt-for-equity deal

Brazil's national development bank BNDES and US utility AES announced details of a debt restructuring regarding the power company's US$1.2bn debts to the bank Monday, ending over a year of talks. AES will transfer stakes in distributor Eletropaulo and its generators AES Tiete and AES Uruguaiana to Brasiliana Energia, a newly-created holding company. The agreement is a debt-for-equity deal under which, in return for writing off US$600mn debt, BNDES would own 49.99% of Brasiliana's voting stock, 100% of non-voting shares, resulting in 53.85% of Brasiliana's total capital. AES will control the new company with 50.01% of voting stock and 46.15% of total capital. Additionally, AES will pay BNDES US$90mn in cash on signing the agreement to pay down the remaining debt. AES will repay the other US$510mn over a period of 11 years, made through convertible debentures guaranteed by the assets of Eletropaulo, Uruguaiana and Tiete, AES and BNDES said in statements. AES will pay a fixed interest rate of 9% a year over the bonds, AES spokesperson Ahmed Pasha told BNamericas. Annual payments will vary on certain clauses giving flexibility to the repayment schedule. In the event of non-payment, BNDES would trade in the debentures and take control of the company. Brazil's central bank and power regulator Aneel are expected to approve the deal in January, AES said. The debt agreement allows Eletropaulo to regain investment capacity and expand operations in the country. BNDES president Carlos Lessa said in an interview to local daily Folha de Sao Paulo on Sunday that the agreement would allow the bank to avoid posting a loss in 2003, since without the agreement it would have had to provision for the unpaid loan. Lessa also told the newspaper that the bank will now concentrate in negotiating unpaid debt problems that AES and other shareholders in Minas Gerais state integrated power company Cemig (NYSE: CIG) have with the bank. AES is part of the Southern Electric Brasil Participacoes (SEB) consortium that bought a 33% stake in Cemig using a US$600mn loan from the BNDES in 1997. SEB defaulted on a US$85mn loan to the BNDES last May. "It [the agreement] removes a large barrier to the sector," Sudameris ABN Amro analyst Rosangela Ribeiro told BNamericas. "It allows BNDES to move on and solve other problems. Also Eletropaulo will be able to tap into the new US$1bn financing line that the bank is making available to help bring distributors back to solvency." For AES, the Brazilian restructuring brings the company back to solvency, allowing access to new funding to finance operations in the Brazilian market. With the agreement, "We now have the stability necessary to move forward with our businesses in an attractive and promising electricity market in South America's largest economy," AES president and CEO Paul Hanrahan said in a statement. "What is key is that this demonstrates we are willing to negotiate with partners to find solutions," AES's Pasha said. "This is the first breakthrough we have and we will continue to seek out some sort of deals in Chile with bond holders and in Argentina." Ribeiro said that the debt deal also reduces financial problems between generators and distributors within the system, which in the past faced cash flow problems because of a 2001-2002 blackout and a decline in energy consumption. For AES, Ribeiro said, the deal is good because just Eletropaulo and Tiete will be able to generate enough cash to make the payments on the debentures, although she doubts new investments will be forthcoming. "With the expected economic growth (of around 4%) and no problems, Eletropaulo will be able to rebuild its cash flow from next year," she said. "But I don't expect any new investment soon because the sector has to wait for more regulatory details of the new model and for the government to determine when to invest." The market reacted well to the agreement, and shares in the AES Elpa holding rose by over 10% on the Sao Paulo exchange (Bovespa) by midday Monday.