Analysis: Debt defaults signal Brazil woes

Eletropaulo is just one of many electric utilities in Brazil with financial difficulties. Can their problems be solved, and the sector turned once more into an attractive investment prospect, asks Siàƒ¢n Green?

In April, AES subsidiary AES Elpa failed for a second time to meet debt payments relating to the purchase of Brazilian electric utility Eletropaulo Metropolitana Eletricidade de Sàƒ£o Paulo SA (Eletropaulo). Eletropaulo, which is controlled by AES Elpa and another AES subsidiary, AES Transgas Empreendimentos, is now reported to have defaulted on a debt repayment for the first time, missing a payment of $25m on a loan it took out last year.

This is the third time in 2003 that either AES Elpa or AES Transgas has defaulted on a debt payment to the Brazil National Bank for Economic and Social Development (BNDES). In January and April, AES Elpa missed payments of $85m and $247m, respectively, while in March, AES Transgas defaulted on a $330m payment.

AES has stated that it is in talks with BNDES to renegotiate the debt, although the Brazilian government has threatened to renationalize the utility. The AES subsidiaries took loans from BNDES in 1998 to buy Eletropaulo. AES Elpa gave Eletropaulo stock as guarantee for the loan, hence any default could result in control of the utility being shifted to BNDES.

But Eletropaulo is by no means the only utility in Brazil to be suffering financially. Like most Brazilian utilities, Celesc, the Santa Catarina state utility, suffered huge losses in 2002, posting losses of R$290m ($92m), an increase of 227 per cent over losses posted in 2001. Cesp, the country’s third largest power generator is also reported to have had difficulty meeting debt repayments this year.

Eletropaulo, which was privatized in 1998, ended 2002 with net debts of R$4.8bn, compared with R$3.7bn in 2001. It is thought to owe BNDES in the region of $1bn.

According to a report by the Economatica consulting group, Brazilian utilities in 2002 suffered a decline of 26 per cent in their gross revenues, and collectively they suffered total losses of R$10bn. Financing costs for Brazilian utilities rose by over 42 per cent in 2002, says Economatica.

The underlying causes of the utilities’ financial difficulties is down to two main factors: slow recovery in electricity demand following the rationing programme of 2001-2002, and the fall in value of the Real against the US dollar. In 2002, the Real fell 35 per cent against the dollar, affecting those utilities with dollar-denominated debt such as AES’ Eletropaulo, and EDF-controlled Light. Electricity demand in 2002 reached 1999 levels, according to Eletrobras, although sharp drops in residential and commercial consumption were recorded. The government has forecast that consumption in 2003 will rise to levels seen in 2000.

These problems in Brazil have been compounded by the fact that, like many international power companies, AES suffered financially in the wake of the Enron crisis. The company, whose generating assets around the world total over 55 GW, has been trying to reduce debt and restore liquidity in response to pressure from both shareholders and credit rating agencies.

Throughout 2002 and 2003, AES has sold a number of generating assets, including businesses in Australia, Bangladesh, Africa, the USA and the Middle East. In April, AES completed the sale of two generation businesses in Africa for a total of $337m. In March, the company announced the sale of two generation businesses in Bangladesh, an ownership interest in.AES Oasis (with interests in the Middle East and Pakistan), and a power company in California, USA, for a total of $327m. AES has also successfully rescheduled $475m of debt and is implementing organizational changes under a concerted programme to strengthen its balance sheet.

The utilities’ financial difficulties leave the Brazilian government in a difficult position. Even though it has threatened renationalization, it is unlikely to want to spend public money bailing out the privatized utilities, but leaving companies such as Eletropaulo to fall into bankruptcy would hurt investment in the sector. This is of particular importance when the country’s power industry is in need of investment in both generating and transmission capacity in order to avert projected future power shortages.

Since 1998, AES has become one of the largest investors in Brazil’s electricity sector
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In addition, shares in Eletropaulo, used as collateral for the AES loans, have fallen by about 50 per cent in value since the loans were taken out. The government would therefore lose money if it renationalized the utility. Nevertheless, AES is rumoured to have offered BNDES a stake in Eletropaulo to settle the payments. BNDES would, in effect, become a partner in some of AES’ operations in Brazil.

An obvious solution is for the government to allow utilities to increase rates, bringing additional revenues from power sales. The government recently allowed four utilities ” Cemig, CPFL, Enersul and Cemat ” to increase their rates by 31.5 per cent, 19.55 per cent, 42.3 per cent, and nine per cent, respectively. Another 13 utilities ” including Eletropaulo ” are scheduled for rate reviews in July. However, the government is wary of the impact of sweeping rate rises on inflation and the general economy.

Most players in the Brazilian electricity market note, however, that there are some fundamental problems with the regulatory framework, and this is not helping their situation. A government taskforce concluded that the electricity crisis was, in part, caused by the design of the wholesale electricity market (MAE). Since the end of 2002, the operation of MAE has been disrupted and spot prices have fallen dramatically. The government wants to replace MAE with a pool model, but not all market players are in favour of this.

Major decisions on electricity market reform in Brazil are not likely to made until late 2003. However, a short-term solution is needed to combat the financial crisis now gripping the sector.

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