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EFS Special Release - Eletrobras Debentures

ELETROBRÁS – Authorities in Brazil and the USA turn a blind eye to the Brazilian Power Giant 20 billion dollar fraud in the securities market

Imagine a living dinosaur freely killing people and destroying buildings in Manhattan without bringing the attention of nobody but the few ones the pre-historic beast swallows! Police does not do a thing, after all it is just a myth, the army says this is not a war, the mayor says there are animal rights activists protecting it, journalists say it has been there for over 20 years and nobody wants to read about it. It is just another city’s old aberration we have to live with.

Eletrobrás, the Brazilian electric power giant state owned company is an aberration similar to the imaginary dinosaur. Authorities in Brazil and in the USA, where the company trades bonds and shares in the securities market, do not give much attention to it, and it keeps on making frauds with small investors' money just naturally. Some journalists, in Brazil and in the USA have repeatedly told that “everybody knows” about these Brazilian state owned companies’ frauds, what lowers the chances of publishing a line on the issue.

The Eletrobrás case on bearer bonds is one of the most impressive unpunished frauds to the securities market that lasts to our days, the size of the fraud and the number of companies and citizens that had tens of billions of dollars out of their pockets simply grabbed by this company over decades with the lenience of authorities in Brazil and in the USA makes of it one of the most amazing and absurd stories of the securities market.

The first reaction of most market analyst to the Eletrobras case is to say this is a problem for the Brazilian government to be judged by Brazilian courts. This would be reasonable if it were not for the fact that some of the most important pension funds and welfare funds of public servants in more than 10 North American states have invested in this company’s shares, these investors are eligible to unpaid dividends, which mostly are not being charged.

Some of the USA institutions that have invested in Eletrobras bonds and shares according to the company’s own documents are listed below:

State Teachers Retirement System of Ohio, The Public School and the Public Education Employee Retirement Systems of Missouri, The Public Education Employee Retirement System of Missouri, University of Richmond, College Retirement Equity Funds & Vanguard Family of Funds, Kansas Public Employees Retirement System, Common Fund of Pennsylvania Retirement System for Public School Employees, Texas Education Agency Robert Scott Commissioner of Education, YMCA Retirement Fund, Yale University, City Employees Retirement System Los Angeles, Public Employee Retirement System of Idaho, Teacher Retirement System of Texas, The Missouri State Employees' Retirement System, Virginia Retirement System, Central States Southeast and Southwest Areas Pension, State of Connecticut Retirement Plans and Trust, State of Minnesota State Employees Retirement Plan, The California State Teachers Retirement System, Massachusetts Institute of Technology Investment Management Company, International Fund for Agricultural Development, IBM Tax Deferred Savings Plan.

Other shareholders, like BNDESPar, which is also indirectly controlled by the same controller partner of Eletrobras, have received dividends for the shares of the company. A North-American and Canadian fund named Brandes has also sued against Eletrobras in Brazilian courts for the unpaid dividends of 4.1 billion dollars, after the lawsuit Eletrobrás acknowledged the debt, yet it has not paid it, because it is waiting for a court decision over the issue and this court decision may take years to come out due to the complexity of the investigation to be carried out.

In relation to the bearer bonds that Eletrobras issued and traded so as to leverage its assets from 1964 to 1993 (most of the Brazilian power grid was built in this period, including power plants like Itaipu, one of the world’s biggest dams) the company does not pay the bonds or convert them into shares under the argument that the Brazilian Government should do so, as it is the controller partner. The controller partner says the liability to these bearer bonds belongs to Eletrobras, there are more than 5000 lawsuits in the Brazilian justice over this issue. For the complexity of the case some of these courts take years to judge this situation. The bearer bonds that were not converted into shares amount to 15 billion dollars, and the company not only denies the liability but has also increased the controller partners’ capital with this money.

Some bonds bearers got to convert their debentures into shares, and now they are suing the company for unpaid interest over the period these shares had not been granted to the bonds’ bearers. The trial will happen on June 24th/2009, if nothing goes wrong, like a minister wanting to “appreciate” the files for some months, what could delay the court’s sentence.

If the electric energy consumers win, Eletrobras will have to pay 3 billion dollars in interest to consumers that lent money to the company decades ago and had enormous difficulty to get the pay back or profit for their investment ironically named as “Compulsory Loan”, a kind of over taxation on the electric energy bills that would later be paid back in the form of debentures if the consumers presented the paid light bills at the company. Eletrobras intentionally and illegally did not convert all these debentures into shares for all the bearers. And these difference has also been used to increase the controller partner’s share of the business.

The most surprising is that this company has a permission issued by American authorities to trade shares and debentures in the USA market, and that important pension funds, even of public employees (list above) have bought them. In 1998 Eletrobras issued 120 million dollars of debentures that were traded mainly in the USA. How come the Securities and Exchange Commission did not warn the market of the dark past of this company? It is simply INSANE. How come this company wants to achieve investment grade at the NYSE? Maybe I should go out in the central park and look for living Dinosaurs.

BNDESPAR presents debentures issued by Eletrobras

Date: Feb 3rd 1998
Souce: Gazeta Mercantil (newspaper)

RIO, Feb. 3 - The BNDESPar, the holding company of Banco Nacional de Desenvolvimento Econômico e Social (BNDES), made the first presentation of an issuing of debentures convertible into common shares of Eletrobrás for domestic and foreign investors. The operation is the first of its kind to be held in the country and it involves R$ 200 million (USD 120 million), the operation will be completed on February 18, under the coordination of Salomon Smith Barney. The exchange can be done in three years from the date of auction completion, debenture holder or when the holder wishes to as long as the holder gives up the payment of interest. There will be two tranches: one for small domestic market and one for major, to be launched abroad. Crysostomo Luiz de Oliveira Filho, executive director of Heritage Bank - one of the coordinators of the operation for the internal market, next to the Omega and Bradesco -, explained that this bond will have two types of compensation: fixed and variable dividends that are compounded. In the first case, the dividend will be paid quarterly, IGPM (Brazilian interest rate) corrected by + 10% per year. The variable remuneration is paid annually, which ensures that exceed 1% of the value of the share of Eletrobrás on the date of the issuing belongs to the debenture holder. Up to 1% belongs to BNDESPar. "It is a new product and mandatorily convertible in shares and can not be redeemed in cash," said the director. According to Oliveira, in exchange, if the end of three years the action of Eletrobrás fall, the holder of the debentures will receive the IGPM, 10% and the dividend variable, and the fall will be damped. If within that period, the paper reaches value between 0% and 22%, the investor receives payments of 82% to 100% of the shares, the average price of last 20 sessions. In a third case, if the share value above 22%, the investor receives a dividend equivalent to the fixed plus variable and 82% of the volume of paper. The rest belongs to the BNDESPar. Nelson Rosental, director of BNDESPar, said that the privatization of Eletrobrás no minority shareholders will lose. The ones who have debentures, he said, at the end of the privatization will be entitled to a basket of shares of the company. "The product protects losses," he said. To perform the operation, the Central Bank (BC) BNDESPar demanded that the company becomes a public company (corporation) and obtains the registration with the Brazioian Securities and Exchange Commission (CVM). The BNDESPar is the second largest holder of shares of Eletrobrás. Of the total of its portfolio, 53.4% are shares from the energy sector, including more than 80% from Eletrobrás. The convertible debenture is a product created in 1993 and now handles USD 13 billion in the global market. The goal is to attract companies that want to generate cash, without pressing the stock market. (Inês Landeira of InvestNews / PG)

Translation: Luciano Medina Martins – journalist (IFJ BR10789)


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