venezuela's edc looks to capital markets

Venezuela's Grupo EDC, the country's largest power producer recently announced a $1 billion investment program to grow its operations in Venezuela, and it is turning to the international capital markets in order to fund the expansion in a balanced and sustainable manner, said executive vice president Andres Gluski.

Keeping Grupo EDC's finances robust through good times and bad is a delicate operation, he said, which will require a mixed approach involving multilateral, bilateral and private-sector loans as well as the issuance of international bonds.

A benchmark stock on the Venezuelan general stock exchange, Grupo EDC is a holding company encompassing two separate operating companies: Electricidad de Caracas (EDC) and Corporacion EDC. EDC is a vertically integrated electricity provider based in the state of Caracas with about $3.3 billion in assets. Corporacion EDC controls all of the groups other investments, which total approximately $1 billion and include telecommunications, gas and television companies in Venezuela, Colombia and El Salvador.

Grupo EDC's equity management has been consistently successful, Gluski said - EDC's ADR program, launched in November of 1998, is the third-fastest such program in the history of Latin America - and the group's debt management will parallel this success.

"What we want to do is to diversify our sources of finance," Gluski said. "We want to avoid balloon payments because the markets are fickle, and [the payments] might fall due in the wrong year."

A key component of Grupo EDC's strategy will be borrowing from official entities, such as export-import banks and multilateral development banks. Relying on these agencies will afford the company a relatively dependable source of capital even when private markets turn sour, Gluski said, and will make up approximately 40% of the funding for the program.

The group is already in the final stages of securing a $75 million loan from the International Finance Corporation to modernize transmission infrastructure in the Caracas area, Gluski said. Regional development banks such as the Inter-American Development Bank and Corporacion Andina de Fomento are also likely to take a role in financing the company's new projects, he said, although no formal agreements have been signed with the two banks to-date.

On the bilateral side, the U.S. Export/Import Bank is also in the process of structuring a loan to Grupo EDC, Gluski said, largely because the company imports between 60% and 70% of its parts and equipment from the U.S. Management is also in discussions with commercial banks to obtain syndicated loans, he said.

But loans alone do not make for a balanced borrowing diet, and up to 20% of the program's cost is likely to be financed with a bond deal, Gluski said.

"Part of the process of diversifying our financing is extending the average lifetime of our debt," he said. Although the emerging debt markets have not yet recovered enough from the volatility of the past 18 months for Grupo EDC to be comfortable issuing a bond, when conditions are right the company will look to tap the markets again.

One of the factors keeping Grupo EDC out of the bond market is the general uncertainty concerning the economic tack Venezuelan president Hugo Chavez will take. A rumored devaluation of the Venezuelan bolivar could impair the company's ability to repay foreign obligations, as its revenues are primarily denominated in local currencies. A devaluation is unlikely in the medium-term, however, Gluski said, considering Venezuela's high levels of reserves, and Chavez's apparent commitment to the current currency regime.

Even if the currency is allowed to fall, the company's conservative debt structure and hedging positions will allow it to ride out the resulting storm, Gluski said. Grupo EDC's relatively low debt levels - about $675 in foreign currency debt and $125 in local currency commercial paper - combined with $250 million in cash reserves would give it ample financial breathing room in case the bolivar weakens.

Debt incurred from financing EDC's new development plan will not push the company's debt-to-capitalization-ratio, currently at 22%, above 30%, he said.

- Matthieu Wirz