WorldCom scandal: Anatel has been monitoring Embratel?s finances for months

A senior source in Anatel has told TELETIME News that the finances of all Brazilian telcos have been closely watched for several months by a team of auditors specially hired for the purpose. When WorldCom removed Embratel from its consolidated balance sheet, a yellow light went on at Anatel warning that the U.S. parent might be planning to divest. Since then the auditors have been monitoring Embratel?s situation with even greater care. They?re also looking closely at the quality of the services provided by the incumbent long-distance carrier to check for evidence of deterioration that might justify preemptive intervention by Anatel to avert irreversible damage. Above all, Anatel is worried about possible ?contamination? of Embratel by WorldCom?s mounting difficulties. It hasn?t detected any signs so far. Meanwhile, José María Zubiría, Embratel?s chief financial officer, has told TELETIME News that bank loans taken out by Embratel have no WorldCom guarantees or other links to the troubled U.S. telecoms giant. Nor has Embratel any debts to WorldCom. ?We have autonomy in investment and operating decisions,? he said. ?There?s no link with WorldCom at all in that respect.? The fact that Embratel isn?t on WorldCom?s balance sheet corroborates this, he added.

Intervention?

Article 110 of Brazil?s General Telecommunications Act empowers Anatel to intervene in any incumbent licensed at privatization on several grounds: for example, if service comes to a halt without justification; if deficiencies or insufficiency aren?t resolved reasonably quickly; if bad management causes financial problems that risk interrupting service; or for grave violations of telecoms laws and regulations. Intervention would involve immediate removal of top management from office. It would last for a predetermined period depending on Anatel?s reason for intervening. First there would have to be a full investigation with unrestricted right of self-defense for the telco in question. The Act provides for summary intervention without prior investigation in exceptional cases. This happened to CRT when Telefonica failed to sell its stake in the LEC within 18 months, as required by the Act. If Anatel intervenes summarily, however, the telco still has the right to contest the intervention while it?s under way. The Act also provides for intervention by a collegiate body or another company. If WorldCom files for protection from creditors or is declared bankrupt, Anatel says it will continue to monitor Embratel?s quality of service and won?t intervene unless there are clear signs of deterioration.

According to the same senior source in Anatel, even though Embratel is an off balance-sheet asset it?s unlikely to escape the clutches of WorldCom?s creditors in the case of bankruptcy. The law would force Anatel to act in this case because it would configure a change of ownership. A new parent (probably a bank) would have to be analyzed just like any bidder in an auction. It must have objective conditions to operate the subsidiary, including financial and fiscal capacity in accordance with Brazilian law. Technical qualifications in telecoms won?t be required because Embratel already has more than enough of its own. Anatel can?t allow a company that already controls or is an affiliate or subsidiary of another Brazilian incumbent to acquire control of Embratel. The source says Anatel isn?t concerned about valuing Embratel if it should go into liquidation or be hived off. The long-distance carrier would be an excellent buy, with high-quality management, networks and satellites. Above all Embratel plays an important role in the Brazilian market by providing corporate services directly as well as backbone and other services to third parties. Should it have to be sold, the source concludes, any group not already operating fixed-line telephony in Brazil will have an attractive opportunity.