Moody's cuts AES Sul ratings

Moody's Investors Service said it downgraded the senior secured R$250 million debentures due 2008 issued by AES Sul Distribuidora Gaucha de Energia SA to Ca.br from Caa1.br. The global local currency rating is also downgraded to Ca from Caa1.

Moody's said the downgrades follow continued weak financial performance at AES Sul, as shown by the company's recently published 2003 annual financial statements. The downgrades additionally reflect AES Sul's ongoing liquidity crisis, specifically as highlighted by management's election to not make the requisite payments on certain of its foreign currency debt obligations and by the company's repeated rescheduling of payments on the rated debentures in December 2002 and December 2003.

The revised ratings are pegged to continued poor financial performance and ultimate anticipated recovery levels for the debenture holders and reflect Moody's expectation of net present value loss severity of 30% or greater under an assumed restructuring of the company's balance sheet that would allow it to continue as a going concern.

With regard to the receivables pledge that guarantees the debenture payments, Moody's is concerned that this pledge would not be enforceable in a bankruptcy proceeding. Given that there is no precedent for the enforcement of this type of pledge in Brazil, Moody's believes that the courts may prevent its implementation, leading to significant delays in the ability of debenture holders to receive payment.

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