Flash Fixed Income Report /

Brazil's Eletrobras: A much-anticipated new issue

    Rafael Elias
    Rafael Elias

    Director, Latin America Credit

    Tellimer Research
    30 January 2020
    Published byTellimer Research

    The much-anticipated new issue from majority state-owned Eletrobras (ELEBRA), LatAm's biggest power utility company, is expected to today in the form of a two-part, benchmark-sized, senior unsecured bond, with one tranche due in 2025 and the second due in 2030. The issue is expected to be rated BB-/BB-.

    The company has a US$1.75bn 5.75% senior unsecured bond due 27 October 2021 outstanding, which trades at cUS$106.033 (ALLQ) to yield c2.19% (g-spread 76bps; z-spread 70bps).

    Initial price guidance for the five-year tranche is "in the 4.0% area" and for the 10-year is "in the 5.0% area".

    Eletrobras has been on the radar of investors because it could be part of the government's privatisation efforts this year. Currently, the federal government owns 40.99% of the company's common stock, with the remaining ownership comprising BNDES/BNDESPAR: 15.99%, government funds: 3.45% and common stock in the hands of "others": 19.94% (mainly market float – the company has c1.087bn common shares and 316.3mn in float for a market capitalisation of cBRL54.617bn or cUS$12.866bn). The company also has preferred shares, of which the federal government holds 16.90%, and BNDES/BNDESPAR c2.73%.

    We believe the possible privatisation of a portion of the government's ownership would be a catalyst for the bonds to tighten their spreads, as it could trigger a ratings upgrade.

    However, as has been the case with most of the LatAm issues printed so far this year, we think the new tranches will probably price lower than the initial guidance (five-year: 3.8-4%; 10-year: 4.75-5%). Given the company's low ratings, we see these levels as expensive.

    That said, we also believe that, despite the low yields (for the rating levels), the new bonds will find strong demand from investors that want to participate in a company with high strategic importance in Brazil, a country that is poised for better-than-expected GDP growth in 2020. Moreover,the bonds could benefit from spread-tightening when and if an additional part of the company is sold to the public.

    For reference, Eletrobras defines itself as:

    "A company constituted by Law no. 3,890-A, dated June 11, 1962, in the form of a joint-stock company, (that) has as attribution the promotion of construction and operation of generation plants, transmission lines and distribution of electric energy, as well as the conclusion of the acts of commerce resulting from these activities, such as the sale of electric energy, causing Eletrobras to contribute decisively to the expansion of the supply of electric energy and the development of the country. The company is responsible for the administration of government programs focused on the development of the electric sector, such as the National Program for the Conservation of Electric Energy ("Procel"), the National Program for Universal Access and Use of Electric Energy ") And the Program for the Incentive of Alternative Energy Sources (" Proinfa ");

    At December 31, 2018, Brazil achieved an installed capacity of 163.4 GW, of which Eletrobras contributed 49.8 GW, or 30.5% of the total. Of this volume, 63.6% correspond to Eletrobras corporate enterprises, 20.4% correspond to its proportional participation in projects carried out through Special Purpose Companies (SPEs) and 16% come from shared enterprises, capacity of Itaipu Binacional (7,000 MW)."