Light : Fitch upgrades Light's national scale rating

RATING ACTION COMMENTARY

Fitch Revises Light's Outlook to Stable; Upgrades National Scale Rating

Thu 21 Jan, 2021 - 17:02 ET

Fitch Ratings - Rio de Janeiro - 21 Jan 2021: Fitch Ratings has af rmed the ratings for Light S.A. and its wholly owned subsidiaries Light Servicos de Eletricidade S.A. (Light Sesa) and Light Energia S.A. (Light Energia), including the companies' Foreign Currency (FC) and Local Currency (LC) Long-Term Issuer Default Ratings (IDRs) at 'BB-'. At the same time, Fitch has upgraded the Long-Term National Scale Rating for the three entities to 'AA-(bra)', from 'A+ (bra)'. The Rating Outlook for the corporate ratings was revised to Stable from Negative.

The revision of the Outlook to Stable follows Light's successful capital increase that will improve the company's capital structure, reducing its high net leverage to 3.5x in 2021 and 3.0x in 2022. The Stable Outlook also incorporates Fitch's expectation that Light will use a considerable part of the proceeds to reduce total debt. On Jan. 19, 2021, Light priced its primary and secondary distribution of common shares, in the amount of BRL2.8 billion, that will be settled on Jan. 22, 2021. Light will receive BRL1.4 billion from the primary offering, which will bring the consolidated credit metrics in line with the current 'BB-' IDRs. The upgrade on the National Scale ratings re ects Light group's strengthening of its credit pro le within the 'BB-' IDR level.

The primary offering will also improve Light group's already satisfactory liquidity position. Light's pro forma cash position of BRL4.7 billion on Sept. 30, 2020, including the capital increase of BRL1.4 billion and BRL336 million received in December 2020 from an

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agreement to end an indemnity judicial claim against Furnas Centrais Elétricas S.A. (Furnas), will cover the BRL3.4 billion debt maturing up to December 2021 by 1.4x. This position includes the around BRL800 million net liability to be paid in the rst half 2021 to Camara de Comercializacao de Energia Eletrica (CCEE) in the energy generation subsidiary Light Energia.

Fitch also views as positive the change in the shareholder structure resulting from the public offering. Light's main shareholder, Companhia Energetica de Minas Gerais (Cemig: Long-Term FC and LC IDRs BB-/Positive), sold all of its shares along with the primary offering, which represented 22.58% of Light's total capital. In Fitch's opinion, the exit of Cemig as a shareholder exclude the weight of the political risk inherent to the public control of the company.

Light and its subsidiaries' IDRs continue to re ect the low to moderate business risk pro le resulting from Light Sesa's exclusive electricity distribution rights in its concession area, combined with assets on the power generation segment at Light Energia, adding to cash

ow predictability during favorable hydrological conditions and risk dilution.

The ratings are still limited by the group's challenge to improve its operational performance and translate it into higher pro tability. Light has been impacted by an unfavorable scenario in the concession area of its most signi cant subsidiary, the energy distribution company Light Sesa, in the Metropolitan Region of the State of Rio de Janeiro, with high energy losses and delinquency rates, as well as disappointing results on the recovery of energy demand. The company has the important challenge to improve its reported EBITDA to levels close to the regulatory EBITDA, which Fitch estimates to be about BRL650 million higher in 2021 (35% of inef ciency).

The IDRs re ect a consolidated view of Light group's credit pro le, due to the existence of cross-default clauses in some debts. The regulatory risk of the Brazilian energy sector was considered moderate, and that hydrological risk exposure, inherent to the sector, is above the historical average and currently pressures the group's consolidated cash ow and

nancial pro le.

KEY RATING DRIVERS

Positive Results of the Follow On: On Jan. 19, 2021, Light concluded its public shares offer through the sale of 137,242.528 common shares priced at BRL20.00 per share. The shares sold contemplated 68,621,264 newly issued common shares (primary offering) and

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68,621,264 common shares sold by Cemig (secondary offering), in the total amount of BRL2.8 billion. With the transaction, Cemig sold its entire 22.58% participation in Light and market free oat increases to 66.78% from 44.6%. Nevertheless, the main bene t in the company's credit pro le came from the meaningful cash in ow from the primary offering.

Improved Capital Structure: Fitch expects Light's consolidated nancial net leverage, according to the agency's criteria, to be 4.1x in 2020 and 3.5x in 2021, reducing to more conservative levels below 3.5x from 2022 on. On a pro forma basis, considering the BRL1.4 billion cash in ow from the primary offering and the company's nancial statements as of Sept. 30, 2020, and the cash out ow of BRL801 million to be paid to CCEE, Light's consolidated net debt/EBITDA ratio reduces to 3.5x, from the 4.1x reported in the LTM ended Sept. 30, 2020.

DERIVATION SUMMARY

Light's IDRs are lower than other electric energy groups in Latin America such as Enel Americas S.A. (A-/Stable), Empresas Publicas de Medellin S.A E.S:P. (BBB/Rating Watch Negative), Grupo Energia Bogota S.A. E.S.P. (BBB/Stable) and AES Gener S.A. (BBB-/Stable). Light's business risk is higher, re ecting its operating environment in Brazil (BB-/Negative), while its peers are more exposed to investment grade countries, mainly Chile (A/Negative) and Colombia (BBB-/Negative). Light's business pro le is more concentrated in energy distribution than those companies, and presents higher leverage.

Compared to a Brazilian electricity group with operations predominantly in the distribution segment, Light's less diversi ed asset base, lower operational performance and more aggressive nancial pro le explain the difference from Energisa group's IDRs (Local Currency IDR BB+ and Foreign Currency IDR 'BB'/Negative).

Compared to Brazilian peers on the National Scale, Lights credit pro le is weaker than Companhia Paranaense de Energia (Copel: AA+(bra)/Positive) and Centrais Eletricas de Santa Catarina (Celesc: AA(bra)/Stable). In comparison with Copel, which has a better business pro le, this company has greater relevance in the generation segment in the consolidated results, lower nancial leverage and more robust liquidity position. The

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--Light Energia's disbursement of BRL801 million in one installment in 2021 to liquidate its debt at CCEE;

--Average annual consolidated capex of BRL1.1 billion during 2020-2023;--Light Sesa's recovery of BRL1.4 billion in non-manageable costs in 2020;

--Dividend payout of 25%, with the payment related to 2019 net income postponed to 2021;

--No asset sale.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

--Improvements in the distribution segment operating performance; with the company's EBITDA closer to the Regulatory EBITDA;

--Net leverage consistently equal or less than 3.5x; --Total leverage consistently equal or less than 4.5x.

Factors that could, individually or collectively, lead to negative rating action/downgrade: --Deterioration of the company's liquidity pro le;

--Net leverage consistently above 4.5x; --Total leverage consistently above 5.5x.

BEST/WORST CASE RATING SCENARIO

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