* Banks tighten terms on loans to power companies
* State lending may take up slack as worries mount
* Eletropaulo faced stricter terms, CPFL folded IPO
By Anna Flávia Rochas
SAO PAULO, Oct 8 Brazilian electricity utilities
are reluctantly witnessing their cost of funding climb just as
interest rates in Latin America's largest economy sink to
all-time lows. Why? Blame it on the government.
Utilities are abandoning plans to list shares, paying higher
interest to sell bonds and facing tighter loan terms following
President Dilma Rousseff's recent interventions in the sector.
Concessions to generate nearly one-fifth of the electricity
in Brazil, the world's sixth largest economy, will expire
between 2015 and 2017. Rousseff, a pragmatic leftist, decided
last month to link renewal of the concessions to the companies
agreeing to make steep electricity rate cuts.
Rousseff said the move aims to bring down some of the
world's highest energy bills and thus reduce costs for Brazil's
struggling manufacturers. However, many industry leaders and
analysts feel that Rousseff's proposal will end up having the
same chilling impact on the sector as a concession reversal.
For years, investors in Brazil's stock market favored shares
in the sector mainly because of power utilities' more stable,
predictable revenue streams, often allowing those investments to
be likened to holding a bond. But Rousseff's recent actions have
changed that perception - perhaps for good.
Likewise, bonds of power utilities were a favorite asset
class among local fixed-income investors that were priced at a
premium because of the industry's predictability. Tougher
fundraising conditions for the companies will translate into
increased caution regarding the sector, analysts said.
"Between now and, let's say, February, there will be not
much for them to do in terms of fundraising apart from the usual
day-to-day stuff," said Márcio Loureiro, an electricity industry
analyst with Votorantim Corretora in São Paulo.
According to Lilyanna Yang, an analyst with UBS Securities
in New York, Rousseff's decision and recent steps by regulators
are fanning uncertainty, which will drive up fundraising costs
for the sector.
"This might lead to higher required return rates for equity
and debt, as well as higher generation prices in the very near
term," Yang said. "There will be a stronger need to have the
National Treasury and state development bank BNDES finance
A decree signed by Rousseff in August helped regulators
speed up the seizure of concessions from utilities that fail to
meet contract terms. While it facilitated the seizure of eight
units belonging to debt-laden Grupo Rede Energia,
some lawyers said the decree casts doubt over the sector's
creditworthiness as a whole.
"Banks are analyzing the sector and they want to know how
much room for refinancing these companies have," José Roberto
Oliva, a partner at local law firm Pinheiro Neto Advogados, said
in an interview.
Nelson Hubner, chairman of industry regulator Aneel, said
last week that companies that do not extend concessions under
the new rules might be forbidden to operate the assets they
choose to abandon.
Last week, a basket of electricity utilities stocks, which
are regulated by the federal government, shed 10 percent of
their value. In the meantime, shares in water and sewage
companies, which are instead overseen by state governments, are
up by 10 percent.
The situation is not boding well for local capital markets
in a year when IPOs and mergers and acquisitions transactions
have struggled as global risk aversion climbed. Banks have also
put the brakes on corporate lending to stem a surge in
delinquencies that reached record highs earlier this year.
On Thursday, CPFL Renováveis, the alternative energy unit of
Brazilian utility CPFL Energia, abandoned plans for
an IPO, saying the way the concessions renewal process had been
undertaken weighed on investor confidence. CPFL is Brazil's
largest private sector electricity distributor.
In explaining the decision, CPFL Renováveis Chief Executive
Miguel Abdalla Saad said that although the renewal plan does not
have any direct impact on the company itself, "the losses that
investors incurred because of those steps and uncertainty over
their effect made markets wary."
Sources had told Reuters that the company's controlling
shareholder was seeking to fetch up to 1 billion reais ($495
million) with the IPO.
Eletropaulo is offering to pay investors more
interest in order to raise 750 million reais from the sale of
local debt notes. The São Paulo-based utility will pay 1.25
percentage point above the benchmark interbank rate CDI,
compared with the 1.09 points originally proposed weeks earlier.
Commercial banks are demanding power companies set aside more
collateral to obtain new loans. Loureiro, of Votorantim
Corretora, expects new investment to suffer minor disruptions,
mainly because development bank BNDES is involved.
The lender, Brazil's main source of long-term corporate
lending, is not worried over the availability of funds for the
"The industry's process of fundraising is very safe," said
Márcia Leal, head of BNDES' power sector division.