Eleven years ago, Chile was shaken by the La Polar case: The company, through a fraudulent model of “unilateral” debt restructuring of its customers, artificially inflated its balance sheet by not recognizing that the debt was uncollectible. This ultimately led to the company’s value plummeting by 99%, devastating the investments of many.
The recent pandemic created significant uncertainty in Chilean society regarding job stability, forcing millions of workers to stay home and making it difficult for many families to meet their obligations, such as paying their bills. To mitigate the consequences, the government, with the support of parliamentarians, passed laws 21.249 and 21.423, which prevented the disconnection of utility services like water, electricity, and gas for late payments and provided the option to reschedule debts into up to 48 interest-free installments.
This led to an incentive to increase consumption (“they can’t cut off my electricity”), resulting in a significant increase in accounts receivable for utility companies, and consequently, an increase in overdue and uncollectible debts. Based on the La Polar experience and the context described, we wanted to investigate whether these measures posed a risk of misvaluation of companies, where the stock price might not reflect the growing difficulty of collecting accounts receivable. To address this concern, we structured an analysis with the following methodology:
- Selected a basic service consumed by an average household
- Evaluated whether accounts receivable for that service increased in amount
- Reviewed whether the aging of receivables deteriorated
- Identified the behavior of uncollectible debt
Compared the stock price behavior with the deterioration of accounts receivable
- Electricity is the basic service on which low-income families in Chile spend the most. For this reason, we selected Enel, the country’s main electricity distributor
- Accounts receivable more than doubled between June 2020 and September 2022. Enel’s explanation is that in January 2022, the USD 1.35 billion fund created by the government of Sebastián Piñera to freeze electricity tariff increases was depleted a year and a half earlier than expected, leading to the generation of accounts receivable due to the tariff differential charged to customers, which only stopped accumulating in August 2022 with the creation of the second stabilization fund. This fund will be financed by households consuming more than 350 kWh per month and will operate for a decade
- As we anticipated, overdue debt increased 2.3 times between June 2020 and September 2022
- Unlike the increase in accounts receivable and overdue debt, the write-off of uncollectibles remained at similar levels to 2021. In fact, in September 2022
The company reported an 11% lower write-off than in September 2020. Enel’s stock began a downward trend in the second half of 2020, reaching a low of $21 in July 2022, 63% lower than in August 2020. However, its value has since risen to $33, a 57% increase from the low seven months ago.
The signing of an agreement to sell Enel Transmisión and the approval to operate a photovoltaic plant in Antofagasta may be factors contributing to the stock’s increase.
On the other hand, the expected impact of the economic measures may not have materialized. Enel reported in June 2022 that it received only 100,000 debt renegotiation requests out of a universe of more than 5.3 million households, and the write-off for uncollectibles in 2022 is likely to be around 10% of net profit, similar to the impact it had on 2021 results. Looking at what happened with Enel, we see that state aid, in general, seems to be ineffective if not well communicated and facilitated for those who need it.
In conclusion, the analysis shows that the enactment of laws preventing the disconnection of utility services for late payments and allowing debt restructuring into interest-free installments did indeed lead to increases in overdue debt (which more than doubled between June 2020 and September 2022) and in uncollectibles (the write-off for uncollectibles remained at similar levels to 2021, mitigated by the second stabilization fund, this time with an undefined duration and financed by high-consumption customers). The positive aspect is that the market in Chile reflects these effects in the stock price, which remains below pre-pandemic levels.