by Aline Lima, Lucy Monteiro and Fabiola Gomes
Light is proposing to repay creditors with a combination of new bonds and equity, and warrants for additional equity for those contributing new money, three sources close to the matter said. Discussions between the Brazilian power company and creditors will now revolve around the terms of this main framework, according to the three sources.
In Light's offer, 60% of the debt of its distribution subsidiary, Light SESA, will be repaid with a new 10-year bond, with a payment-in-kind (PIK) feature in the first three years and grace period for the amortization of the principal in the first four years, according to the first source. The interest rate proposed – the IPCA inflation benchmark plus 2% – is the main point of contention, the first and second sources noted.
“This interest implies a huge haircut, around 50% considering that the bond should pay IPCA+ 10% in the market,” the first source said.
The period offered for the PIK is considered long by domestic bondholders, but the four-year grace period and six-year amortization are in line with expectations, a fourth source close said.
The remaining 40% of Light SESA's debt will be paid with a convertible bond, according to the first, second and third sources. The conversion into equity is contingent on the renewal of Light's concession contract, the first and second sources said.
However, the conversion will be subject to further discussions with regards to a potential discount, if the market value of the debt is considered rather than its nominal value, according to the third source.
Light has increased the amount of a proposed capital injection, to BRL 1.5bn from an initial BRL 1.0bn, as reported. Light's largest shareholder, Nelson Tanure, has agreed on a backstop of BRL 1bn, according to the second source. Creditors participating in the capital injection will receive one Light SA share plus warrants for two additional shares, according to the first, second and third sources.
The equity price which will serve as basis for both capital injection and debt-to-equity conversion transactions has not yet been defined, according to the first, second and third source. Ultimately, the equity price will depend on the repayment terms in the plan, the third source noted.
“If there is an increase in the interest rate the company will pay on the new bonds, for instance, it would probably need to raise more cash, the upside of the converted debt will likely be lower, that is, the variables are somehow interrelated,” the third source said.
Although offering equity to repay a portion of the debt is seen by Light as a way to “reduce asymmetry” between shareholders and creditors, the company will likely need to address options to the creditors that are more resistant to accepting equity, according to the third source. This is the case of fund managers with restrictive investment policies, for example, the same source noted.
For creditors of Light Energia, the power generation subsidiary, the repayment terms have remained the same from those in the plan filed with the court on 15 July, according to the first source. Light Energia is the issuer of 35% of Light’s USD 600m 4.375% 2026 bonds.
“Light is proposing full repayment of Light Energia's portion of the bond,” a fifth source close said.
The idea is to reach an agreement on the debt restructuring of Light Energia and Light SESA at the same time, in order to avoid future risks if the bonds change hands after the negotiation is concluded, the fifth source said.
The company has received some positive reaction from domestic bondholders, but still needs to hear international bondholders' opinions, according to the fifth source.
Light and its domestic bondholders have a new meeting scheduled for 19 October to discuss the company's proposal, according to the fourth source. Conversations are progressing, the same source said, noting that domestic bondholders are “reasonably in line” with the other creditors.
Light expects to conclude negotiations with creditors by December, the fifth source said. “Such a timeline would be adequate for every stakeholder, for the company, bondholders, debenture holders, banks,” the same source said.
A spokesperson at Light did not respond to a request for comment on the matter.
Light’s USD 600m 4.375% 2026 bonds last traded at 46.75 on 6 October, according to MarketAxess.
