Fitch: Eletrobras' Capitalization of Intercompany Loans Neutral to Credit Quality

According to Fitch Ratings, Centrais Eletricas Brasileiras S.A.'s (Eletrobras) recent announcement that it may capitalize intercompany loans provided to its subsidiaries (in which Eletrobras holds almost 100% of the capital) will not impact Eletrobras' credit quality.

Fitch currently rates Eletrobras as follows:

--Foreign Currency Issuer Default Rating (IDR) 'BBB-';

--Local Currency IDR 'BBB-';

--Senior Unsecured Notes due 2019 'BBB-'.

The Rating Outlook is Stable.

Eletrobras intends to convert, or capitalize, several of its intercompany loans to wholly-owned or near wholly-owned operating subsidiaries (operating companies) in order to improve the capital structure of these controlled subsidiaries. The reduction of parent company debt at the operating companies will reduce their debt burden, lower interest expense, increase profitability on a stand alone basis, and potentially increase dividend flows to the holding company. On a consolidated basis, debt levels would remain unchanged. While the capitalization of the operating companies debt, in theory, results in a more subordinated cash flow stream from the operating companies to the holding company to serve holding company debt, i.e. dividend versus interest payment, Eletrobras' control of these assets allows it the financial flexibility to engage in intercompany transactions if required.

The rationale for the ratings and Outlook assigned to Eletrobras are strongly driven by the linkage to the Brazilian Government and its implicit support. Fitch believes this support remains strong and unaffected. Fitch expects that should the capitalization of intercompany loans occur, the combination of increased dividend inflow from its subsidiaries and the debt service from Itaipu and unrelated companies will be more than enough to service debt at the holding company and pay dividends to shareholders. In the unlikely event of a liquidity event, the holding company could reduce its dividend outflow or refinance debt with the sector fund Global Reversion Reserve (Reserva Global de Reversao; RGR) managed by Eletrobras. In both cases, the implicit support from the Brazilian Government would be key to supporting these initiatives.

As of June 30, 2009, Eletrobras' total loan portfolio was BRL 36 billion, out of which BRL 17 billion were related to controlled subsidiaries, BRL 15 Billion to Itaipu and BRL 4 billion to unrelated companies. This portfolio has generated BRL 3.8 billion in interest income earned by the holding company in the last 12 months ended in June 30, 2009. Fitch believes the loan capitalization will affect only the BRL 17 billion portfolio related to controlled subsidiaries, and would reduce interest income to a pro-forma figure of around BRL 1.5 billion, or 40% of interest income earned so far.

Debt at the holding company was BRL 11.9 billion at June 30, 2009, out of which BRL 3.4 billion in debt with financial institutions, BRL 1.2 billion in obligations with Brazilian National Treasury and BRL 7.4 billion with RGR fund. This has generated BRL 541 million in interest expenses in the last 12 months ended June 30, 2009, which would still be covered in almost 3.0 times by the pro forma BRL 1.5 billion interest income after the intercompany loan capitalization.

Additional information is available at ' www.fitchratings.com'.

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