S&P Global downgrades Brazil's Eletrobras

S&P Global Ratings has downgraded Brazilian federal power company Eletrobras' standalone profile from ‘bb’ to ‘bb-’ and reaffirmed the company's ‘brAAA/brA-1+’ long and short-term issuer credit ratings on a countrywide basis following the consolidation of Santo Antônio Energia (Saesa).

Saesa is a special purpose company (SPE) responsible for the operation of the 3,568MW Santo Antônio hydroelectric power plant in northern Rondônia state.

It is controlled by another SPE, Madeira Energia, and has Eletrobras subsidiary Furnas as a shareholder with a 43% stake, along with Caixa FIP Amazônia Energia, Odebrecht Energia do Brasil, SAAG Investimentos and Cemig Geração e Transmissão. 

Saesa needs a 1.58bn-real (US$330mn) capital increase to pay for a legal dispute it lost with the builders of the plant, but its other shareholders have reportedly declined to participate in the operation, with only Cemig confirming publicly the decision. 

Furnas will begin to consolidate the results of Saesa in its financial statements after an indirect capitalization that will increase its stake in the company to about 70%.

S&P believes the consolidation of Saesa will hurt the financial metrics of Eletrobras because the project is highly leveraged – as of March 31, its debt totaled 19.4bn reais, which led to the downward review on the standalone credit profile.  

“In our view, the pace of deleveraging will depend on the execution of its strategy of disposal of assets,” the rating agency said in a report. 

The stable outlook regarding long and short-term issuer credit ratings indicates the expectation that Eletrobras will continue to reduce leverage in the next 12-24 months through the sale of non-strategic assets, while improving its operating performance, S&P added.

On May 18, the federal audit court (TCU) approved the privatization model for Eletrobras, which last week announced details of its share sale plan.

Investors are fearing a possible impact of a court ruling involving Saesa on Eletrobras’ sell-off, but company executives deem such an impact unlikely.

S&P said that, if the proposed privatization is implemented, including limits on government influence on management and strategic decisions of the firm, it may revise its assessment of the bond between Eletrobras and the government, which it currently sees as “very strong.” 

“Everything else remaining the same, this would trigger a revision of our assessment of the extraordinary support probability in the event of financial difficulties from extremely high to high or weaker,” the agency added.