Justice suspends essential meeting for Eletrobras privatization

The Federal Court of Rio de Janeiro granted in the early hours of Sunday (5) an injunction to suspend the holding of the meeting of debenture holders of Furnas, a subsidiary of Eletrobras, to evaluate a company’s investment in Madeira Energia, controller of the Santo Antônio hydroelectric plant, in Rondônia.

The meeting was convened for this Monday (6th) and its holding is a vital step for the government to be able to proceed with the capitalization of Eletrobras, scheduled for until June 14th.

If the procedures for this capital injection are not completed this Monday (6), the privatization will be suspended, according to a warning from Eletrobras made in the prospectus that deals with the global offering of shares.

The injunction was granted by the judge on duty Isabel Teresa Pinto Coelho Diniz in a lawsuit filed by the Furnas Employees Association, which alleged formal defects in the process of calling the meeting.

Members of the Jair Bolsonaro (PL) government are already mobilized in an attempt to reverse the injunction and ensure the assembly takes place. The AGU (Advocacy General of the Union) will appeal the decision.

Furnas is a partner in Madeira Energia, with a 43% stake, and announced that it is preparing to take on a capitalization in the company that needs to reach R$ 1.5 billion. The contribution will cover the costs of Santo Antônio’s defeat in an arbitration court.

With this operation, Furnas would take control of the company, reaching a 70% stake.

To make this contribution, the company needs a prior approval from investors of debentures issued by the company in 2019. Otherwise, the injection of resources into Madeira Energia may trigger the early maturity of the debentures, depending on the debt assumed.

A first meeting was called for last Monday (30), involving investors for two series of debentures. In the case of the first series, concentrated on large investors, there was a quorum and approval was given to the operation. It was necessary to gather 50% of the investors.

However, this quorum was not formed for the second, more dispersed series, and the definition was left for a new assembly – now suspended.

The Furnas Employees Association, represented by Souza Neto e Tartarini Advogados, alleges that the call for the meeting does not respect the minimum period of eight days in advance and violates the shareholders’ agreement itself, since Furnas has already made a first contribution of BRL 681.4 million on June 2, before obtaining approval from all investors.

The quorum required for the second meeting (30%) and compliance with the company’s minimum compliance and governance rules are also questioned.

The entity is still questioning the company’s decision to assume all the risks of Madeira Energia’s debt, since the capitalization will not be accompanied by the other partners.

In addition to Furnas, Madeira Energia’s shareholders are Odebrecht (18.25%), renamed Novonor, the Caixa FIP Amazônia Energia fund (19.63%) and SAAG Investimentos (10.53%), with participation by Andrade Gutierrez . None of them expressed interest in accompanying Furnas in the investment operation. Another Cemig partner (8.53%) reported not being interested in joining.

“I grant the provisional urgent relief, in the form of article 300 of the CPC [Código de Processo Civil]to determine the suspension of the Furnas Debenture Holders Meeting scheduled for 06.06.2022 until the Natural Judge analyzes the regularity of the vices alleged by the plaintiff for the second general meeting of Furnas debenture holders”, reads the decision.

If Furnas is unable to meet all the financial requirements to meet the cost of arbitration (objective of the allocation of resources), the application of the sentence will trigger what is called a cross default — the execution of debts and guarantees of Furnas and Eletrobras

The stock offering prospectus details the scale of the problem. “If Furnas is not successful in obtaining these consents [waivers dos investidores]the trustee must declare the early maturity of the obligations”, says the text.

“In this case, the debenture event may cause the early maturity of other Furnas debts, approximately 63.6% of the consolidated debt”, he warns.

If this occurs, the “Furnas event” may still trigger the early execution of Eletrobras’ debts, equivalent to approximately 42% of the consolidated debt.

According to the prospectus, as of March 31, 2022, Furnas’ consolidated total indebtedness was R$7 billion and that of Eletrobras was R$41.6 billion.

“If such an early maturity occurs, Furnas believes it will not be able to honor the payment of the majority of its indebtedness, just as the Company understands that it does not have sufficient resources to pay the majority of its indebtedness”, states the text.