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MISSION:INTANGIBLE, the blog of the Intangible Asset Finance Society, offers critical comments on intangible asset, corporate reputation, and finance; supplemented by quantitative reputation metrics. Intangible assets include business processes, patents, trademarks; reputations for ethics and integrity; quality, safety, sustainability, security, and resilience; and comprise 70% of the average company's value. MISSION:INTANGIBLE is a registered trademark of the Intangible Asset Finance Society.

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Companhia Energetica Minas Gerais: Ominous signs

C. HUYGENS - Friday, March 22, 2013
Businesses operating in heavily regulated sectors invest significant resources in compliance matters and benefit from these exercises in control by having significantly fewer adverse reputational events. Steel City Re's actuarial data indicate that all things being equal, a company in the health care or utility sector is half as likely to experience a reputational value crisis.

Further analysis of Steel City Re's data by Consensiv show that the risk of a material loss of 7.5% or more in market capitalization is similarly reduced in these two sectors. Consensiv's analysis also indicates that there are warning signs of a pending adverse market cap event. All things being equal, an increase in the current RVM volatility in excess of 7% is associated with an increased risk of a near-term market cap fall. Background on the measures of reputational value can be found in the book, Reputation Stock Price and You: Why the market rewards some companies and punishes others.

Because they are in many ways protected from market forces, healthcare companies and utilities tend to attract investors with low risk tolerances who are rewarded with predictable performances. The lives of these companies are not unlike those of anesthesiologists: 99% boredom and 1% pure terror. When bad news comes, rare as it is, reactions are profound. A rapid rise in the current RVM volatility, or as it is called by Consensiv, the Consensus Trend, should therefore be doubly regarded as a credible warning sign.

Companhia Energetica Minas Gerais, or CEMIG, (NYSE:CIG) is a Brazil-based holding company primarily engaged in the electricity sector. The Company is mainly active in the construction and operation of systems of production, transformation, transmission, distribution and commercialization of electric power. It is also a constituent member of the RepuStars Variety Composite Equity Index, calculated by S&P/Dow Jones Indexes whose value is reported weekly on this blog.

Four weeks ago, as shown in the chart below, CEMIG's  Current RVM Volatility (top row, right, red EWMA CIG curve) began rising sharply. The data in the chart are current as of last Thursday, 8 days ago. Wednesday, 2 days ago, equity values plunged after "Banco Bradesco SA and Banco BTG Pactual SA disclosed their expectation (note the presence of that key word, expectation) that Brazil’s regulator might curb electricity rate increases." Other consequences included sending the Bovespa index to a two- week low.

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