Brazil Utility Suspended on NYSE as Costs of Corruption Unclearby
Utility said late Tuesday it won’t file 2014 annual report
State company still assessing impact of corruption on results
The New York Stock Exchange suspended U.S. trading of Brazil’s state-owned utility Eletrobras Wednesday and began delisting procedures after the company said it would miss a deadline to submit its 2014 financial results.
Centrais Eletricas Brasileiras SA, as the utility is formally known, has already delayed the filing to the U.S. Securities and Exchange Commission three times as it conducts internal investigations to put a price tag on corruption. The Rio de Janeiro-based company still doesn’t have enough information to assess the impact on its financial statements.
The move by the NYSE will make it harder for Latin America’s biggest electric utility to tap U.S. debt markets. It follows the Brazilian meatpacking giant JBS SA’s announcement last week of plans to create a New York-listed unit to access cheaper capital. Eletrobras’s effort to estimate the cost of corruption comes amid the country’s massive probe into graft, Operation Carwash, that led to an overhaul last year at the state-owned oil company Petrobras and the suspension this month of President Dilma Rousseff.
Eletrobras has had years of losses “and now investors realize it’s just the tip of the iceberg,” said Alexandre Montes, an equity analyst at Lopes Filho & Associados Consultores de Investimentos in Rio de Janeiro. “Now there’s the Carwash corruption scandal and it sticks in investors’ minds. They will never be willing to put money in the company again.”
The company said in a statement late Tuesday that it was expecting the NYSE to suspend trading of its U.S.-traded American depositary receipts, and that it plans to appeal the decision while continuing to work on finishing the delayed reports. The ADRs, each worth one ordinary share, may start trading in the exchange’s less prestigious over-the-counter market, the company said May 11.
The shares plunged as much as 6.7 percent in Sao Paulo Wednesday. Eletrobras’s $1 billion bonds due in 2019 tumbled 1 cent to 96.7 cents on the dollar, following a 2.4-cent plunge Tuesday, boosting the yield.
Eletrobras is negotiating with the SEC about filing its annual reports with addendum, Armando Casado, head of investor relations, said in a May 16 conference call with analysts. The NYSE delisting procedure takes some time and Eletrobras is making efforts to file the required documents before it’s concluded. It won’t affect the company’s debt because its loan covenants are linked to financial statements filed with the Brazilian securities regulator.
A NYSE spokeswoman declined to comment, and Eletrobras has repeatedly said it will only discuss the investigation through statements to Brazil’s market regulator.
“The situation creates uncertainties about Eletrobras’s financial numbers,” said Jose Soares, a senior credit officer at Moody’s Investors Service Inc. “It damages the company’s image and worsens its capability to raise funds.”
There is also a risk that aggrieved investors may sue the company, Soares said. Eletrobras already has two shareholder lawsuits filed in the U.S. related to corruption allegations.
The delisting may spur U.S. investors to sell and Brazil’s government will end up buying the ADRs, according to Mauro Storino, a senior director at Fitch Ratings. Brazil’s government has already signaled that delisting would put pressure on the country’s treasury, and is pressing the company to complete its investigation.
It comes a little more than a year after Petrobras said corruption cost it $2.1 billion after Brazilian federal investigators uncovered a pay-to-play scheme involving the country’s biggest builders, lucrative public works contracts and politicians.
The utility last year hired a team led by the international law firm Hogan Lovells and the Brazilian firm WFaria Advogados, to evaluate the cost of corruption. They are still investigating projects cited in testimony to determine whether additional writedowns are necessary.
Finance Minister Henrique Meirelles Wednesday said the government will have to analyze the utility’s capitalization, according to the newspaper Folha de S. Paulo. The government isn’t discussing replacing the company’s management, Energy Minister Fernando Coelho Filho said.