To Win Over Bond Traders, Brazil Utility Taps New CEO Amid Probe

  • Eletrobras has tapped Wilson Ferreira Jr. to be its new CEO
  • Company’s bonds have rebounded after tumble last month

Latin America’s biggest power utility is trying to convince investors that the rebound in its bonds is far from over as it emerges from a corruption scandal.

Centrais Eletricas Brasileiras SA, which is controlled by Brazil’s government, has reportedly tapped Wilson Ferreira Jr. to be its next chief executive officer, replacing a political appointee. Ferreira, who has a reputation for privatizing assets and boosting profitability, is credited with turning utility CPFL Energia SA into the largest integrated energy company in Brazil during his 18 years there.

The move is likely to boost bondholder confidence in Eletrobras, as the company is known, according to Solitaire Aquila Ltd.’s Patrik Kauffman. The unprofitable utility, which meets a third of Brazil’s electricity needs, has sought to win back investor trust since 2014, when prosecutors started alleging fraud across some of its projects. While Eletrobras’s $1.75 billion of notes slumped after the company was delisted by the New York Stock Exchange last month, they’ve rebounded since and are now up 18 percent this year. That’s more than twice the emerging-market average. The bonds due 2021 rose 1.4 percent to 91.5 cents on the dollar at 1:16 p.m. in New York.

“Ferreira Jr. is positive news for Eletrobras,” said Kauffman, who owns Eletrobras’s bonds as part of the $11 billion in assets he helps manage. “I am looking forward to seeing the bonds rally.”

Ferreira presided over a surge of about 150 percent in CPFL Energia shares since an initial public offering in September 2004. Eletrobras’s shares have dropped 14 percent in that span.

The Rio de Janeiro-based utility is turning to Ferreira after shareholders authorized the company to sell its 51 percent stake in Celg Distribuicao SA for at least 1.43 billion reais ($433 million), part of a government effort to raise cash to ease its budget deficit.

By tapping Ferreira, the government of acting President Michel Temer is saying that it wants a “profitable company,” said Alexandre Montes, an equity analyst at the investment consulting company Lopes Filho & Associados Consultores de Investimentos. Temer took office last month, when President Dilma Rousseff was temporarily removed from her post while she faces an impeachment trial.

“Eletrobras’s former CEO was nominated by Dilma, who was willing to sacrifice the company’s profitability to build projects nobody wants and turned Eletrobras into a hospital for companies that were in trouble,” Montes said from Rio de Janeiro. “Ferreira Jr. is the complete opposite of all this. The management change is excellent for Eletrobras.”

Still, the company faces challenges. 

The utility’s auditor, KPMG LLP, has refused to sign off on its U.S. financial statements as an internal team of lawyers and accountants tracks the alleged fraud in projects from a nuclear power plant tucked in a Rio de Janeiro bay to a massive hydrodam deep in the Amazon jungle, a person with direct knowledge of the matter said last month. The filing delay prompted the delisting of Eletrobras’s American depositary receipts.

CPFL’s press office confirmed Ferreira Jr. has accepted the post at Eletrobras, which declined to comment on the new management. At the time NYSE announced it was delisting, the state-run company said in filings that it planned to appeal the decision while continuing to work on finishing the delayed reports.

On May 10, the nation’s electricity regulator also ordered Eletrobras to reimburse the government because of irregularities in how it managed a fund used to finance a program to improve access to electricity. Fitch Ratings estimates Eletrobras may have to pay back 7 billion reais over 90 days if it can’t successfully appeal the ruling.

While these risks remain, the company could boost its creditworthiness if it completes the planned asset sale, said Adriane Silva, an analyst at Fitch.

“We expect that an executive who comes from the market with experience will make the transition the company needs,” she said.

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