by Aline Lima and Fabiola Gomes
Light's [B3: LIGT3] management is an obstacle to the Brazilian energy company reaching a debt restructuring agreement with creditors, due to a lack of credibility, according to a source close to creditors and Claudio Brandao, co-founder of BeeCap, an advisor to domestic bondholders.
A Rio de Janeiro court granted the judicial reorganization request made by the Light SA holding company today, extending the protection to the operating subsidiaries not included in the petition. The move is seen as a maneuver to circumvent rules forbidding concessionaires from filing for bankruptcy protection.
One of the options creditors can count on is the ability to eventually present an alternative restructuring plan, the source close said.
“The management team has lost all trust of the regulator and creditors,” the source close to creditors said. “What is at stake is the legality of the process and the respect for the regulatory framework. Many creditors also have investments in other concessionaires, and they do not want a harmful precedent to be created for them in other situations.”
“Creditors are now allowed to present an alternative plan [in Brazilian bankruptcy processes, if the debtor's plan is rejected], but the longer the restructuring takes, the greater the possibility of the asset value deterioration and an increased risk of [government] intervention, exacerbating the distressed situation,” a source close to the company said.
Brazilian regulator Aneel intervened in Grupo Rede and changed its management in 2012, and "the past normally guides the vision of the future," Brandao said.
“It is impossible to imagine that any investor looking at [Light's] management would want to allocate even BRL 1.00 in a new loan,” Brandao said. “This team earned the distrust of the sector.”
There are two “strategic players” – companies in the Brazilian energy sector – interested in Light and “the regulator has enough time to work with this possibility,” the source close to creditors said.
While international bondholders, holders of the domestic bonds and banks “are in talks with each other every day,” the electricity firm has been avoiding having conversations with creditors in the past few months, even during the mediation process that preceded the request for bankruptcy protection, Brandao said.
“Creditors called the company to negotiate several times, but its management always said it was not ready for that,” Brandao noted.
One of the sensitive points regards the inclusion in the restructuring process of Light Energia, the generation and transmission arm, which is in financially healthy situation, according to the source close to creditors. Light Energia is the issuer of 15% of Light's BRL 11bn (USD 2.23bn) in total debt – equivalent to around one third of its USD 600m in international bonds. Banks Bradesco and Itau Unibanco also have debt with the power generator, the same source said.
“What the company intends to do is present a plan in which creditors of the generator are paid in full, but for that they would need to accept the other terms, which is an attempt to buy votes,” the source close to creditors said, noting that “all creditors are aligned”.
“The bonds were issued by both the generator (35%) and the distributor Light SESA (65%), and a possible future discussion is the segregation of the international notes,” Brandao said. However, the proceeding would rely on several steps, including bondholders’ approval, which is very difficult to obtain because these notes are spread in the market, he added.
The approved compensation plan for Light's management – a stock option package equivalent to 5% of the company's capital – is also seen by creditors as “an affront,” the first source close to creditors said.
“Management's fiduciary duty is to defend the interests of all stakeholders, not only shareholders,” the source close to creditors said, noting that such remuneration must occur after the approval of a debt restructuring plan.
“It makes little difference whether compensation occurs before or after approving the plan because the equity is worth practically zero,” the source close to the company said.
Some repayment proposal 'ideas'
In the meantime, Light has been working with some “ideas” for creditors’ repayment, which may combine options based on a range of expected energy tariff scenarios, as it is still unknown what the terms of an eventual concession renewal might be, according to the source close to the company.
“Light needs at least 10 years to amortize its debt without taking the risk of refinancing it again,” the source close to the company said.
Creditors willing to accept longer maturities could benefit from better repayment terms, such as lower haircuts and higher interest rates, according to the source close to the company. A debt-to-equity swap could also be a component that reduces the asymmetry between creditors and equity holders, the same source said.
Light has already suggested a 50% haircut to some market participants, according to the source close to creditors.
The company is betting on an early renewal of its power distribution concession, which expires in June 2026, and will inform the government of its interest in renewing the concession by the end of the month, CEO Octavio Lopes said during a conference call today.
Light’s USD 600m 4.375% 2026 bonds traded at 38.25 on 16 May, according to MarketAxess.
"Light believed that judicial mediation would be a viable solution for the group's financial imbalance," a Light representative said in an emailed statement. "However, when starting this process, it was faced with the belligerence of a small group of creditors, who did not want to join the mediation. Thus, the holding 's judicial reorganization remained as the alternative capable of preserving the normality of operations in our concessions."
"Despite the aggressiveness of this small group, we have started constructive conversations with most of the creditors and believe that we will be able to present a judicial recovery plan within a period shorter than the legal period, which is 60 days," the spokesperson wrote.