Fitch: Sabesp's Ratings Downgrade Risk Higher

RIO DE JANEIRO--(BUSINESS WIRE)-- Companhia de Saneamento Basico do Estado de Sao Paulo's (Sabesp) ratings remain under pressure and a downgrade is increasingly likely within the next two months if a rebound in the reservoirs levels do not occur, according to Fitch Ratings. The company's most important water reservoirs are at concerning low levels at 15 % as of March 16, 2015, with limited improvement since November 2014, when the reservoir levels were at 8.8%. Risks of the government implementing further water supply restrictions have increased materially and heighten uncertainties regarding the company's ability to provide full service and sustain adequate operating cash flow generation in 2015.

Fitch estimates that Sabesp's EBITDA may decrease up to 40% in 2015 to around BRL2.5 billion from BRL4 billion in 2013 should Sabesp's main reservoir water levels not recover significantly within the next five to six weeks. Operating cashflow at this level will result in its net leverage increasing to 3.8x in 2015, almost double compared to the 2012-2013 average of 2.0x, which may lead to a rating downgrade. Fitch initially expected Sabesp would delever to a net leverage ratio below 2.3x by 2015. Sapesp's net leverage should be in the range of 3.0x-3.3x in 2014. During the latest 12 months (LTM) ended September 2014, Sabesp's cash flow from operations (CFFO) was BRL2.1 billion, not enough to cover capex of BRL1.9 billion and dividends of BRL467 million, leading to a negative free cash flow (FCF) of BRL419 million.

Fitch believes Sabesp has adequate liquidity despite a potential operating cash flow loss in 2015. Sabesp's cash on hands was robust at BRL1.9 billion in September 2014, which favorably compares to BRL712 million of short-term debt and corresponds to a ratio cash/short-term debt of 2.6x. Debt maturing through December 2015 is BRL1.3 billion. Fitch also considers Sabesp's positive track record of accessing local capital market. Fitch would consider it positive if Sabesp implemented measures to protect its liquidity by reducing its capex plan until operational cash flow normalizes. Sabesp's average capex for the period of 2013 and LTM September 2014 was BRL2.6 billion.

The Cantareira water supply system, which is Sabesp's most important, is facing the most critical conditions despite an increase in water levels during the last few weeks. On March 16, 2015, this system had only stored 15% of its total capacity. This figure includes 29 percentage points (p.p.) due to the use of two technical (contingent) water reserves which had been assessed in 2014 when the system was at critical levels. The Cantareira currently supplies 5.3 million consumers (21% of total). On the same date, the second most important water supply system, Alto Tiete, currently serves 4.5 million consumers, and was at 21.8% of its storage capacity. Fitch estimates these reservoirs need to end the rainy season with water levels at around 30% of capacity for the company to be able to meet its regular customers demand.

Fitch believes Sabesp's main reservoirs are unlikely to recover by the end of the rainy season, which is around mid-April. Historically, the Cantareira and Alto Tiete systems have decreased by 27 p.p. on average during the period from May to November on average over the last five years. The lack of a satisfactory recovery of Sabesp's main reservoirs by the end of the rainy season implies that its water supply should significantly deteriorate from May to November, the period in which rainfall is usually significantly lower, i.e. the dry season.

Fitch's believes that a potential tariff increase would not be enough to offset this weaker scenario. The company has limited room to offset the pressure on its FCF generation through costs reduction and, even lower ability to reduce capital expenditures as it also continues to invest to improve operations and expand capacity. Sabesp's initiatives to limit the operating impacts of the current drought conditions on its activities are positive, but it will not likely be sufficient to avoid a deterioration of its credit profile. The company is enhancing reservoir interconnections for the supply of the Metropolitan Region of Sao Paulo, which by May 2015, should provide additional volumes of treated water available for the population. Sabesp has also expanded incentives for its customers to reduce water consumption. These initiatives should partially alleviate the pressure over the company's water supply during the next few quarters.

Fitch currently rates Sabesp as follows:

--Long-term foreign currency Issuer Default Rating (IDR) 'BB+';

--Long-term local currency IDR 'BB+';

--Long-term national rating 'AA(bra)';

--Senior unsecured notes due in 2016 and 2020 'BB+'.

The Rating Outlook is Negative.

Additional information is available at 'www.fitchratings.com'.

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Fitch Ratings
Gustavo Mueller
Senior Analyst
+55-21-4503-2632
Fitch Ratings Brasil Ltda.,
Pra ca XV de Novembro, 20 - Room 401 B - Downtown
Rio de Janeiro - RJ - CEP: 20010-010
or
Adriane Silva
Senior Analyst
+55-11-4504-2205
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
[email protected]

Source: Fitch Ratings

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