SAO PAULO--(BUSINESS WIRE)--Fitch Ratings has removed from Rating Watch Negative and downgraded, the ratings for Energisa S.A. (Energisa) and its subsidiaries. Fitch downgraded the local and Foreign Currency Issuer Default Ratings (IDRs) for Energisa to 'BB-' from 'BB', and for its subsidiaries to 'BB' from 'BB+'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this press release.
Key Rating Drivers
The downgrade reflects the pressure expected on Energisa's consolidated credit metrics from its recently concluded acquisition of Grupo Rede. Fitch also considered the challenges Energisa will face in improving the currently below average operational performance and cash flow generation of the eight distribution companies acquired.
On Dec. 17, 2013 the Brazilian Regulatory Agency (Aneel) approved the reorganization and investment plan submitted by Energisa for Grupo Rede. The plan comprises the incorporation of BRL4.5 billion of Grupo Rede's net debt (after the write-off of part of the debt at Grupo Rede's holdings level) and operating integration of its assets. The acquisition concluded on April 11, 2014.
The one-notch difference between Energisa's ratings and those of its subsidiaries is based on the relevance and structural subordination of the holding company's debt compared to that of the operating companies. The holding company debt represented approximately 22% of net consolidated debt as of Dec. 31, 2013.
Leverage to Increase After Grupo Rede Acquisiton
Fitch expects the acquisition of Grupo Rede will have a material impact on Energisa's leverage ratios. Fitch expects a consolidated net leverage between 4.0 times (x) and 5.0x in 2014, which incorporates BRL4.5 billion in net debt of the acquired group, including the upfront payment of approx. BRL450 million for Grupo Rede's creditors. Energisa issued BRL1.5 billion in debentures in March 2014 for the upfront payment and to refinance around BRL1 billion of debt at the acquired distribution companies' level. In 2013, Energisa presented a total debt-to-EBITDA ratio of 4.8x and a net debt-to-EBITDA ratio of 3.5x.
High Capex Needs to Pressure FCF
The acquisition of Grupo Rede will initially add pressure on Energisa's cash flow as a result of additional capital expenditures requirements. Energisa's free cash flow (FCF) is expected to stay negative in the following years as operational improvements and synergies should be obtained gradually. In 2013, cash flow from operations (CFFO) of BRL505 million was insufficient to fund capital expenditures of BRL723 million and the dividend distribution of BRL181 million, resulting in a negative FCF of BRL399 million.
Acquisition Funding
Fitch expects Energisa to fund part of the acquisition and the new capex requirements with appropriate funding and potential equity contribution from shareholders of BRL500 million. The ratings also factor in Fitch's expectation that Energisa will succeed in refinancing the existing debt of Grupo Rede's subsidiaries at a lower interest rate and lengthened maturity profile.
Rating Sensitivities
Fitch will monitor Energisa's operational and financial performance with the new distributors, mainly in cash flow generation and credit metrics and its impact in the overall credit profile of the group. A downgrade can be considered if Energisa sustains its consolidated leverage measured by net debt to EBITDA ratio above 4.0x after 2015. An upgrade, although unlikely in the short term, could be considered if in the medium term leverage ratios return to levels historically reported of around 3.0x.
Fitch has downgraded the following ratings:
Energisa S/A
--Foreign currency IDR to 'BB-' from 'BB';
--Local currency IDR to 'BB-' from 'BB';
--Long-term national scale rating to 'A(bra)' from 'A+(bra)'
Energisa Paraiba - Distribuidora de Energia S/A (Energisa Paraiba)
--Foreign currency IDR to 'BB' from 'BB+';
--Local currency IDR to 'BB' from 'BB+';
--Long-term national scale rating to 'A+(bra)' from 'AA-(bra)';
--Long-term national rating of the first debentures issuance, in the amount of BRL80 million, due in 2014, to 'A+(bra)' from 'AA-(bra)'.
Energisa Sergipe - Distribuidora de Energia S/A (Energisa Sergipe)
--Foreign currency IDR to 'BB' from 'BB+';
--Local currency IDR to 'BB' from 'BB+';
--Long-term national scale rating to 'A+(bra)' from 'AA-(bra)';
--Long-term national rating of the second debentures issuance, in the amount of BRL60 million, due in 2014, to 'A+(bra)' from 'AA-(bra)'.
Energisa Minas Gerais - Distribuidora de Energia S/A (Energisa Minas Gerais)
--Foreign currency IDR to 'BB' from 'BB+';
--Local currency IDR to 'BB' from 'BB+';
--Long-term national scale rating to 'A+(bra)' from 'AA-(bra)';
--Long-term national rating of the seventh debentures issuance, in the amount of BRL60 million, due in 2014, to 'A+(bra)' from 'AA-(bra)'.
Additional information is available at 'www.fitchratings.com`.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'National Scale Ratings Criteria' (Oct. 30, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
National Scale Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=827151
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