Moody's assigns Ba1 / Aa2.br rating to CEMIG GT's BRL 1 billion senior, unsecured, backed debentures; outlook negative
Global Credit Research - 17 Jun 2015
RATINGS RATIONALE
The Ba1 ratings of CEMIG GT reflect the combined generation and transmission profile of the company given that it has a strong presence in the Brazilian electricity sector, a solid and competitive management team, good historical access to the capital markets, and above average corporate governance practices.
On a consolidated basis, CEMIG's rather ambitious equity investment plans, the evolving Brazilian regulatory framework, and a historically high dividend pay-out ratio constrain the ratings, as do the risks associated with the potential political interference of the Government of the State of Minas Gerais (Baa3 negative) in CEMIG's business strategy, and the ongoing lack of definition from the federal regulatory agency (ANEEL) with respect to the process of renewal and indemnification of CEMIG-GT's generation concessions. The negative outlook of the State of Minas Gerais also constrains CEMIG's ratings.
Rating Outlook
The negative outlook reflects our expectation that CEMIG-GT will continue to be pressured due to the ongoing challenging hydrology conditions as well as the possible negative outcome of the judicial dispute with the Federal Government related to the renewal of the Jaguara, São Simão and Miranda concessions, which will potentially weaken the company's overall liquidity position. The negative outlook also reflects the current negative outlook for the State of Minas Gerais, which controls CEMIG, and our expectation that the electricity sector overall in Brazil will continue to suffer a decline in operating margins for the remainder of 2015 given the persistent challenging hydrology conditions. A stabilization of the outlook could be considered in the case of a positive outcome for CEMIG-GT by being allowed to keep the aforementioned concessions.
What Could Change the Rating -- Up/Down
With the return of the Jaguara, São Simão and Miranda's concessions to the Federal Government we expect that the credit metrics will be under pressure for the remainder of 2015, and potentially into 2016. Therefore, an upgrade rating action is very unlikely in the short to medium term. The ratings could be downgraded if CEMIG-GT continues to increase leverage to make large equity investments or acquisitions, in addition to maintaining a high level of dividend distributions to its parent, CEMIG, or fails to secure long-term financing at reasonable terms that will allow the company to preserve an adequate liquidity level and robust capital structure. Quantitatively, we would consider downgrading the ratings if there was a material deterioration in the companies' respective credit metrics as follows: