AES has completed the $2.3 billion restructuring of its Brazilian assets, ending a fraught set of negotiations with the Brazilian government and putting it in business alongside its former lender, BNDES. AES has managed to retain control of its assets, and avoid repudiating its debts to the Brazilian development bank. In the process, however, it has retired some of the most novel structures of its financings in the country, including the influential AES Tiete insurance.

AES' utility subsidiary - Electropaulo - defaulted on 2.3 billion reals ($787 million) in debt to private creditors. AES defaulted on the $1.2 billion in acquisition debt it raised from BNDES against Electropaulo as well as other interests in the country. BNDES officials called the problem loans 'one of the worst skeletons inherited from the previous administration', while AES had been highly critical of the Brazilian regulatory environment.

This environment has seen revenues in both the generation and distribution sectors, and especially the distribution sector, plummet. Brazil, has suffered a drought, and lower than expected hydroelectric production. Government efforts to lower electricity consumption were wildly successful - so much so that demand has still not recovered. The devaluation also caused a drop in revenue available for debt service.

AES Tiete was a $300 million 144A financing for a series of hydroelectric assets, which featured groundbreaking, and still unique, devaluation insurance from Opic, on which bondholders did call. It works best when an issuer has a reasonable chance of piercing the sovereign ceiling. Tiete, however, has power purchase agreements with Electropaulo, which is in default. As a result Fitch has the bond's rating at B-

For this reason the Opic insurance has been cancelled, and noteholders have agreed to changes in the terms of the notes, largely in the way they amortize. The new terms put back the required interest and principal payments from 2004 and 2005, and create a new repayment profile from 2006, largely to allow Tiete to repay some intercompany borrowing.

AES' 44% economic stake in Tiete has also been included in the new vehicle, Brasiliana, by which BNDES' claims against AES will be paid. AES has given up a 49.9% voting and 53% economic interest in the new company, in exchange for the forgiveness of $510 million in debt - the remainder, which is still non-recourse, is owed to BNDES. Alongside the Tiete stake are AES interests in Sul, Uruguaiana and Electropaulo.

AES is also working towards an agreement with the lenders to Electropaulo at an operating company level. It has negotiated a reprofiling, by which 75% of Eletropaulo's debt will be denominated in Brazilian reals, compared with 58% today. This new arrangement waits for final agreement, but should make AES Brazilian operations less vulnerable to currency risk. Whether they can thrive in the remodelled Brazilian energy market will be the main test of AES' nerve.

Brasiliana Energia

Status: Holding company restructuring agreed January 2004

Size: $1.2 billion

Location: Brazil

Description: restructuring and debt for equity swap of Brazilian generating and utility operations.

Sponsor: AES

Lender: BNDES