Fitch Affirms Sabesp at 'BB+'; Upgrades National Scale Rating to 'AA(bra)'
RIO DE JANEIRO -- May 24, 2013
Fitch Ratings has affirmed Companhia de Saneamento Basico do Estado de Sao
Paulo's (Sabesp) foreign currency and local currency Issuer Default Rating
(IDR) at 'BB+'. At the same time, Fitch has upgraded its national long-term
rating to 'AA(bra)' from 'AA-(bra)'. A full list of rating actions follows at
the end of this release.
The corporate Rating Outlook is Stable.
Key Rating Drivers
These rating actions reflect the strengthening of Sabep's credit profile
within its international rating category of 'BB+', resulting in the national
rating upgrade. The company has been consistent in maintaining its robust
financial profile, despite the relevant capex, and sustaining its high EBITDA
margins and reduced financial leverage for its predictable operating segment
in addition to robust liquidity. Fitch has considered favorable the
development of the tariff revision process which has resulted in moderate
tariff adjustment for Sabesp effective April 2013, to be confirmed in
September 2013. The ratings also are supported by the company's near
monopolistic position in its business area, as well as on the economies of
scale obtained as the largest basic sanitation company in the Americas by
number of customers.
Sabesp's ratings are limited by its aggressive capex going forward, with
long-term returns, a recurring need for debt rollover, despite important
progress having been made given debt issuances in advanced, and the
considerable foreign exchange exposure of its indebtedness. The company has
the challenge to improve its operating ratios due to the new regulatory
environment with higher demand for efficiency on every tariff revision cycle.
Sabesp's businesses are also subject to hydrological conditions and the
political risk inherent to its state control. Sabesp is also exposed to
Brazil's basic sanitation regulatory model, which is recent and has yet to be
Solid Operational Cash Generation
In the recent years, Sabesp's operational cash generation has been robust
supported by the consistent growth of its activities. Excluding construction
revenue, the company's net revenue of BRL8.4 billion during the latest 12
months (LTM) ended first quarter of 2013 (1Q'13) grew 9% against 2011,
benefitted by tariff readjustments of 5.15%, in September 2012, and 6.83%, in
September 2011, in addition to the 2.5% increase in the volume of water and
During the same period, Sabesp reported EBITDA of BRL3.6 billion, with a 43%
margin (excluding the construction revenue), which is strong for the industry.
The company has been successful in maintaining its operational efficiency,
even after additional expenses, mainly those relative to the contract signed
in June 2010 with the Municipality of Sao Paulo (MSP). The company may benefit
from the pass through to the tariffs of the higher expenses related with the
contract with the MSP, if authorized by the regulatory body (Arsesp), expected
to release a decision by august 2013. The challenge for Sabesp will be to
sustain its robust operating cash generation within the next revision cycles,
when higher efficiencies should be required.
Investments Pressure Free Cash Flow
Fitch believes that Sabesp should continue to report negative free cash flow
(FCF) in view of the high annual investments foreseen, around BRL2
billion-BRL2.5 billion, mainly focusing the expansion of sewage collection and
treatment services. During the LTM ended 1Q'13, Sabesp reported consistent
CFFO, of BRL2.6 billion, which compares to BRL2.7 billion in 2011. The FCF was
a negative at BRL187 million, pressured by the aggressive investments which
amounted to BRL2.2 billion, and by the dividend distribution of BRL579 million
in the same period.
Maintenance of Adequate Credit Measures
Sabesp has been efficient in sustaining reduced financial leverage for its
operating segment, considering its predictable operating cash generation. As
of March 31, 2013, the company's total adjusted debt/EBITDA ratio was 3.2x and
the net adjusted debt/EBITDA ratio was 2.6x, compared with 3.4x and 2.7x,
respectively, by the end of 2011.
Fitch's expectations are that the company will manage its net leverage under
3.0x going forward, despite continued strong investments, which will be
important for future assessments. As of March 31, 2013, Sabesp's total
adjusted debt was BRL11.5 billion, with significant portion (BRL3.2 billion)
exposed to exchange rate fluctuations and without hedging instruments, which
could generate negative pressures on the company's credit metrics and
financial covenants in the event of a significant devaluation of the Real.
Satisfactory Liquidity Reduces Debt Refinancing Risk
The maintenance of substantially more robust liquidity positions reduces
Sabesp's debt refinancing risk. The volume of financial obligations maturing
in the coming years, despite its manageable indebtedness maturity profile,
combined with expectations for negative FCFs, indicates the need for
continuous and relevant rollover payment of Sabesp's debt.
The company's strategy to issue its funding needs in advance has been
positive, reducing the company's exposure to tighter liquidity scenarios.
Sabesp's satisfactory track record in accessing the debt market, due to the
strength of its business, also partially mitigates this risk.
As of March 31, 2013, Sabesp's cash and marketable securities position was
BRL2.1 billion. The BRL850 million short-term debt coverage ratio by liquidity
was 2.5x, being 1.6x including total payments maturing until 2014.
Low Business Risk
Sabesp's low business risk is based on its almost monopolistic position as the
provider of water and sewage services of 363 municipalities in the state of
Sao Paulo and has been confirmed by its resilient performance in recent years.
The company benefits from the large gains of scale compared to its peers and
as the largest water/wastewater company in the Americas.
Sabesp has been efficient in reducing losses and has made progress in signing
concession contracts with the municipalities it serves. No significant water
supply issues are expected over the short term. As to the political risk,
Fitch has not noted any relevant change in company's risk after the change of
government in the state of Sao Paulo, in early 2011.
The ratings could be upgraded as a result of lower commitment of operational
cash generation to investments, or cash generation growth above Fitch's
expectations. An upgrade is also possible in case the debt profile is
lengthened and the reliance of frequent rollovers is reduced.
Pressure on the ratings could occur in the event of frustrations and greater
volatility of cash generation after the final definition of the tariff
revision, larger than expected investments and a weakening of the current
liquidity policy resulting on weaker financial profile.
Fitch has taken the following rating actions.
--Local currency long-term Issuer Default Rating (IDR) affirmed at 'BB+';
--Foreign currency long-term IDR at affirmed at 'BB+';
--USD140 million notes affirmed at 'BB+';
--USD350 million notes affirmed at 'BB+';
--National long-term rating upgraded to 'AA(bra)' from 'AA-(bra)'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'National Ratings - Methodology Update' (Jan. 19, 2011);
--'Corporate Rating Methodology' (Aug. 08, 2012).
Applicable Criteria and Related Research:
National Ratings Criteria
Corporate Rating Methodology
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