November 25, 2012 6:47 pm

Investors protest over Brazil energy move

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Foreign investors are threatening legal and other action in protest against government intervention in Brazil’s electricity industry, which they say risks deterring much-needed infrastructure investment in the country.

The warning follows a government move to slash power tariffs that has hit Brazil’s biggest electricity generator Eletrobras, whose stock plunged to a 17-year low last week after Barclays revised its target for the share from R$29 to R$1.

In a separate case, foreign creditors of another group, Rede Energia, which distributes electricity in seven states, are fighting unprecedented government intervention in the company that they say is forcing the fire sale of its main assets.

“We see this as a form of nationalisation of property so in fact this is more or less the same as we have seen in Venezuela or Argentina,” said Kristian Falnes, head of the Norway-based Skagen Global fund, a large minority investor in state-controlled Eletrobras.

Brazil rejects such comparisons, saying the electricity measures involve no breach of contract.

The government of President Dilma Rousseff is facing a balancing act between trying to stimulate Brazil’s flagging economy and improve the country’s competitiveness while attracting an estimated $1,000bn needed for planned infrastructure investments.

Ms Rousseff wants to cut Brazil’s electricity costs, which are among the highest in the world, by as much as 28 per cent for national industry.

Power companies with electricity concessions can either accept new contracts now with the lower rates or continue to charge the old rates but risk losing leases when they come up for extension.

Brazil has concessions for 22,000 megawatts of generation capacity, or nearly one-fifth of the country’s total capacity, due to expire between 2015 and 2017, Reuters estimates.

But Skagen, which holds about 17 per cent of Eletrobras’s outstanding preferential shares and 1 per cent of ordinary shares, warned of possible legal action if the company agreed to the new concession plan by a December 4 deadline.

In the case of Rede Energia, the industry regulator seized the group’s eight operating companies in August, giving them until year-end to present a plan to revamp operations in the biggest state intervention in the sector.

The move was aimed at ensuring the group, which is facing financial difficulties, continued its operations.

But Bingham McCutchen, a law firm representing creditors of Rede Energia’s 11.125 per cent perpetual notes, said its clients were concerned the company was now planning with government support to sell control to two groups, CPFL and Equatorial, without an open tender process.

Bingham argued that this had occurred with another troubled subsidiary of the group, Celpa, which was also sold to Equatorial, controlled by Brazilian private equity group, Vinci Partners.

“Investors’ global experience confirms that an open and fair bidding process is the best way to maximize value for investors,” Bingham said. It warned that creditors were considering “legal remedies”, including putting Rede into bankruptcy.

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