* State-owned Eletrobras could rescue Rede, CEO says
* Rede's unit Celpa asked for bankruptcy protection
* Two bidders walked out of talks to buy Grupo Rede
* Situation mirrors woes in power distribution sector
By Leila Coimbra and Guillermo Parra-Bernal
RIO DE JANEIRO/SÃO PAULO, Feb 28 (Reuters) - Brazil's state-controlled power holding company Eletrobras could help bail out debt-laden rival Grupo Rede Energia if requested by the federal government, Chief Executive José da Costa Carvalho Neto said on Tuesday.
The woes facing Grupo Rede, including rampant debt and slowing revenue growth, could cause "economic and social malaise" that could justify a rescue plan, Carvalho Neto told reporters in Rio de Janeiro. He did not say whether the federal government has already suggested a plan or requested a bail out.
Carvalho's remarks came hours after Celpa, an electricity distribution unit of Grupo Rede serving the northern state of Pará, filed for bankruptcy protection citing "a worsening financial and economic situation." Grupo Rede's liabilities almost tripled to 6 billion reais ($3.4 billion) over the past five years.
"If we are called upon, we will have to do something," Carvalho Neto said, referring to a potential bailout of Grupo Rede. "It will entirely be a decision of the federal government."
In recent weeks, efforts by Grupo Rede's Chairman and largest shareholder Jorge Queiroz Jr to sell part or all of its 54 percent stake in the company have suffered serious setbacks.
China's State Grid and AES Corp gave up on buying the stake, citing regulatory risks and the high price requested by Queiroz, sources with knowledge of the situation told Reuters.
Yields on Grupo Rede's 11.125 percent perpetual bond were at 13.91 percent on Tuesday, unchanged from Monday. Last week, they soared by about one percentage point to 14.15 percent after State Grid pulled out of the bidding process.
Fitch Ratings lowered Celpa's debt ratings late on Tuesday to "D" - a ranking only given to debtors that are expected to fall behind on most or all liabilities. Fitch also said it may further cut Grupo Rede's "CCC" ratings.
The "CCC" ranking is attributed to borrowers facing vulnerabilities and who dependent on favorable economic conditions to meet their commitments.
Prices on Celpa's 2016 bonds tumbled to 75 cents on the dollar on Tuesday, from about 102 cents on the dollar on Monday. Bond yields, which trade inversely to prices, spike when risk perceptions about the issuer of the securities deteriorate.
Queiroz's stake is valued at 1.1 billion reais by sources and analysts. Since both State Grid and AES gave up on Grupo Rede, speculation had mounted that Eletrobras and rival CPFL Energia could buy Queiroz out.
Grupo Rede's assets have been considered a takeover target as the government and private companies boost their market share in power distribution, a segment in which bigger scale offsets the risk of lower power rates in coming years. Consolidation is key for the companies, known as DisCos, to gain financial and operating muscle.
Yet, apparently, there are no firm bidders left for the company.
In an interview with Reuters earlier in the day, CPFL Energia Chief Executive Wilson Ferreira Junior said the company is unlikely to expand its distribution business much beyond its current areas - raising questions about whether the company would bid for Grupo Rede.
Many power utilities might be considering selling or merging with rivals as stricter rules for rate increases take effect later this year, Ferreira said.
Eletrobras, which the federal government has tasked with executing a plan to boost investment and foster competition to lower electricity rates across Brazil, owns 34 percent of Celpa and is a major creditor of the unit. Celpa has for years grappled with too much debt.
"In spite of the efforts by management with creditors and potential investors (in the company), the request for bankruptcy protection was inevitable as the financial and economic problems of Celia aggravated," Celpa said in a securities filing, adding that the company aims to keep serving its customers.
One solution for Celpa and other assets controlled by Grupo Rede could be a breakup, analysts told Reuters.
A federal government-led purchase of electricity distribution assets, however, may not guarantee a solution to the industry's problems, which range from regulatory noise to slowing profit growth and mounting competition, according to Rafael Andreatta, an analyst with São Paulo-based brokerage Planner Corretora.