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Rede Energia Bonds Plummet on Unit’s Bankruptcy Protection

Bonds issued by Rede Energia SA and unit Centrais Eletricas do Para SA plummeted after the Brazilian utility known as Celpa filed for bankruptcy protection amid increasing debt and more than four years of frozen tariffs.

Rede Energia’s perpetual dollar-denominated bonds fell 29 cents to 53 cents on the dollar as of 4:14 p.m. in New York, according to data compiled by Bloomberg. Celpa’s dollar notes due in 2016 climbed 10 cents to 60 cents after tumbling 54 cents yesterday, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority. Fitch Ratings cut Celpa’s bond rating to D from B- after the filing.

“This announcement will likely result in a payment default for some or all of Celpa’s debt and result in a protracted debt renegotiation,” Fitch analyst Renata Pinho said in a note yesterday. “The Celpa default will negatively affect the payment capacity of Rede as well as trigger cross default provisions.”

State-controlled Centrais Eletricas Brasileiras SA, or Eletrobras, may bail out Rede Energia if requested by the government, Reuters reported yesterday, citing Eletrobras Chief Executive Officer Jose Carvalho Neto. An Eletrobras press officer, who asked not to be identified under corporate policy, declined to comment on the Reuters report. Eletrobras owns about a one-third stake in Celpa.

Government Ties

“These companies have cash flow problems, but they also have links with the federal government,” Marco Aurelio de Sa, a director at Credit Agricole Securities, said yesterday in a telephone interview from Miami. “Eventually some sort of arrangement will be made, especially when you consider the Brazilian government has a strategic interest in the electricity sector.”

Rede Energia said in December that it was looking for a “strategic partner” to buy a minority or controlling stake in Celpa to reduce debt.

Rede is controlled by Chairman Jorge Queiroz de Moraes Jr. An investment fund of FGTS, Brazil’s workers’ compensation fund, and BNDES Participacoes SA, the investment arm of the state development bank, are also Rede shareholders.

“Rede has become a must-do acquisition for Eletrobras,” Alfredo Viegas, a managing director of emerging markets at Knight Capital in Greenwich, Connecticut, said today in a note to clients.

Rising Debt

About 66 percent of Celpa is owned, directly or indirectly, by Rede Energia, while Eletrobras holds about 35 percent, according to Bloomberg data.

Celpa’s debt increased to 1.96 billion reais ($1.14 billion) in the third quarter of 2011 from 1.57 billion a year earlier, while cash and equivalents tumbled to 259.1 million reais from 680.4 million in the same period.

Celpa owes 150 million reais to Banco Bradesco SA, Brazil’s second-largest bank by market value, according to a person familiar with the debt. A Bradesco press official declined to comment on the debt when contacted by telephone.

Celpa said it distributes electricity to 7.4 million people in 143 municipalities in Brazil’s northern Para state. Celpa is the biggest power distributor in Brazil’s remote Amazon region by the number of consumers, according to Abradee, the country’s power distribution association.

Failed Rescues

A bailout of Celpa wouldn’t be good for Eletrobras, UBS AG analysts Lilyana Yang and Luiz Pinho said in a report today.

“Eletrobras has failed to turn around several small distribution companies in the 1990s through loss-making rescue plans,” they said.

A default on dollar bonds by Celpa may be the first since Brazilian meatpacker Independencia SA missed payments on $165 million of bonds in Sept. 2010. The company had already defaulted in Feb. 2009 after the global financial crisis eroded demand for beef an dried up financing.

Recent rulings by Brazil’s electricity regulator, known as Aneel, “impacted drastically” on Celpa’s earnings, the company said late yesterday in a regulatory filing in which it revealed the bankruptcy. Aneel delayed since August its four-year review of Celpa’s tariffs, the company said.

The lack of revised tariffs, the need to continue investing and growing indebtedness “highly compromise its capacity to honor its obligations,” Celpa said.

Rede “is a group that can’t go it alone any longer,” Adriano Pires, the head of the Rio de Janeiro-based Brazilian Center for Infrastructure, said yesterday in a telephone interview. “There has been talk several times that it would be sold, but nothing has come through yet.”

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