Fitch Assigns 'BBB(bra)' to Eletropaulo's BRL300MM Debt Issuance.

CHICAGO & RIO DE JANEIRO, Brazil -- Fitch Ratings has assigned a long-term national scale rating of 'BBB(bra)' to the issuance of BRL300 million syndicated loan facility (CCB) by Eletropaulo Metropolitana Eletricidade de Sao Paulo S.A. (Eletropaulo). The proceeds from the issuance will be used for prepayment of the remaining debt previously renegotiated in 2004 and to cover payment of swap adjustments in connection with the US dollar portion of the re-profiled debt, fees and taxes.

The CCB issuance totaling BRL300 million, will be in two series. The first series will have a 5-year tenor with an average life of 2.96 years. The second series will have a 7-year tenor, with an average life of 4.40 years. Interest on the first and second series will be based on the accumulated variation of the CDI rate plus 1.65% and 2% per year, respectively, and will be paid every six months.

The rating reflects the company's improving credit-protection measures, which should strengthen over the next year, supported by projected growth in operating income and cash flow and the expected reduction in annual debt service. The debt structure includes an amortization schedule that reduces refinancing risk until 2007.

Eletropaulo should also benefit from the improved outlook for the Brazilian regulatory environment. While regulatory risk remains an ongoing credit concern, the approval in 2004 of the new electric energy industry model is positive and provides some certainty with respect to the direction of the sector.

Eletropaulo has made significant strides in improving its capital structure following its debt re-profiling in May 2004. The company has reduced its exposure to foreign currency through the re-profiling, when it converted 70% of that debt to reais, as well as through bonds issued in reais and new local debenture issuances. The new proposed BRL300 million CCB issuance supports this strategy resulting in a total debt composition that better protects the company from exchange rate fluctuations. With this issuance, Eletropaulo will fully repay the re-profiled debt.

Eletropaulo has reported credit protection measures that are considered strong for the rating category. For the year of 2005, Eletropaulo reported net revenues of BRL8.3 billion, up 12% from BRL7.4 billion for 2004. Despite increased revenues, reported EBITDA was lower reflecting increased operating expenses, mainly due to extraordinary and non recurring provisions, including allowance for doubtful debts of BRL330.5 million, referred to an agreement signed with the Municipal Government of Sao Paulo (MGSP). The company reported an un-adjusted EBITDA of BRL1.1 billion for 2005 and BRL1.3 billion for 2004.

Fitch adjusts Eletropaulo's EBITDA to reach a figure that provides a better indication of cash flow. The adjustments include the positive adjustment for RTE (regulatory asset amortization) of BRL334.9 million; interest on Fundacao CESP debt of BRL46.4 million, which is also added to interest expense; the addition of the non-cash provision with MGSP of BRL330.5 million; the positive adjustment for allowance for doubtful debts of RTE of BRL176.9 million; and the negative adjustment of BRL72 million related to the reversal of the PIS' provision, resulting in an adjusted EBITDA figure of BRL1.9 billion for 2005, compared to an adjusted EBITDA in 2004 of BRL1.7 billion. Adjusted EBITDA covered interest expense of BRL450.4 million by 4.3 times (x) for 2005, with debt/adjusted EBITDA of 2.6x (3.0x for 2004). Revenues and EBITDA were positively affected by an 18.6% average tariff increase in July 2004 and 2.1% increase in July 2005, although energy billed consumption declined by 3.2% in 2005. Coverage ratios are expected to improve continued economic and electricity demand growth, annual tariff adjustments and longer term as debt amortizes.

Eletropaulo is the largest electricity distributor in Latin America in terms of revenues. Eletropaulo operates as a natural monopoly for the distribution of electricity in its concession area. The company has a 30-year exclusive concession (beginning in 1998) to distribute electricity to a service territory that includes 5.3 million customers in 24 municipalities in the greater Sao Paulo metropolitan area.

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