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DEALTALK-State action boosts funding costs for Brazil utilities
October 8, 2012 / 4:10 PM / 5 years ago

DEALTALK-State action boosts funding costs for Brazil utilities

* 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 (Reuters) - 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 capacity expansion.”

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.

CAPITAL MARKETS

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 electricity sector.

“The industry’s process of fundraising is very safe,” said Márcia Leal, head of BNDES’ power sector division.

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