Key Rating Drivers
The revision of the Rating Outlook reflects Sabesp's challenging scenario which makes it uncertain that the company can report credit metrics in line with the current ratings in 2014 and 2015. Fitch estimates a relevant reduction in Sabesp's cash flow generation at least in 2014 as a result of a severe rainfall shortage coupled with the company's decision to postpone to
Sabesp faces a stressed operating environment given the prolonged low levels of rainfall in the Sistema Cantareira reservoir region, which is responsible for producing nearly one-third of the total volume of water produced by the company and for the supply of its main region of service. Sabesp has taken measures to avoid water rationing, which includes an incentive program to reduce water consumption in the metropolitan region of
Sabesp's ratings are supported by its historical growing demand for its services and predictable cash flow generation under a regular hydrological environment. The company benefits from high EBITDA margins compared to its peer group, an extended debt maturity profile and robust liquidity position, which should partially mitigate the current operational concerns. The ratings incorporate the company's near monopolistic position in its business area, as well as the economies of scale obtained as the largest basic sanitation company in the
The analysis considered the risks associated with Sabesp's high percentage of foreign currency debt on its balance sheet and the still-new regulatory environment for the company. Fitch also factored in the political risk inherent with its control by the
Severe Drought Pressures Leverage
Fitch's current projections assume that Sabesp's net leverage should grow to above 4x in 2014, which is high for its rating category and compares unfavorably with the 2.4x achieved in the last 12 months (LTM) ended
High and Predictable Cash Generation Weakened in 2014
Sabesp's decision to postpone the tariff increase implementation up to
In 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
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
High Liquidity Mitigates Refinancing Risks
The maintenance of substantially more robust liquidity positions since 2010 reduces Sabesp's debt refinancing risk and should benefit the company within the current deteriorated operating environment. The company's proven access to debt markets and manageable indebtedness maturity profile should also contribute to its financial flexibility. As of
The Negative Outlook could result in a downgrade if Sabesp's challenging operating scenario persists for a longer time or the company fails to return its credit metrics to previous levels, with a net leverage remaining consistently above 4.0x.
A Rating upgrade is unlikely in the short term. In the medium- to long-term upgrades may result from lower operational cash generation committed to investments or cash generation growth above Fitch's expectations, combined with net leverage below 2.0x. Lower FX debt exposure and reliance on frequent debt rollovers should also benefit future assessments.
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+';
--National long-term rating affirmed at 'AA(bra)'.
The Rating Outlook for the corporate rating has been revised to Negative, from Stable.
--'Corporate Rating Methodology', including 'Parent and Subsidiary Rating Linkage', dated
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Fitch Ratings Brasil Ltda.,
Praca XV de Novembro, 20 - Sala 401 B -
Source: Fitch Ratings
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