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Rating Action:

Moody's affirms Sanepar ratings; assigns Ba2/Aa2.br to proposed BRL350 million debentures

 The document has been translated in other languages

05 Feb 2020

NOTE: On February 11, 2020, the press release was corrected as follows : The methodology paragraph in the Press Release was corrected to “The methodologies used in these ratings were Regulated Water Utilities published in June 2018, and Government-Related Issuers published in June 2018. Please see the Rating Methodologies page on www.moodys.com.br for a copy of these methodologies.” Revised release follows

Sao Paulo, February 05, 2020 -- Moody's America Latina Ltda., ("Moody's") has affirmed the Corporate Family Ratings (CFR) and senior unsecured debt ratings assigned to Companhia de Saneamento do Parana -- SANEPAR ("Sanepar" or "the company") at Ba2/Aa2.br (Global scale and Brazilian national scale, respectively) and maintained the ba2 baseline credit assessment (BCA). The outlook is stable. At the same time, Moody's has assigned Ba2/Aa2.br ratings to its proposed 10th issuance of senior unsecured debentures in the amount of BRL350 million due 2027 and 2029. Proceeds of the issuance will be used to support capital investments.

The ratings assigned to the proposed debentures are based on preliminary documentation. Moody's does not anticipate changes in the main conditions that the debentures will carry. Should issuance conditions and/or final documentation deviate from the original ones submitted and reviewed by the rating agency, Moody's will assess the impact that these differences may have on the ratings and act accordingly.

RATINGS RATIONALE

Sanepar's Ba2/Aa2.br corporate family ratings reflect: (i) the company's attractive concession area, with long-term contracts providing visibility over cash flow generation; (ii) its solid operating performance relative to peers; and (iii) strong and resilient credit metrics, with funds from operations (FFO) to net debt and FFO interest coverage expected to be above 37% and 6.4x, respectively.

The ratings also reflect the short track record of the applicable regulatory framework, with a new tariff-setting mechanism approved in 2017 that aims to compensate investments made by the company. The company is still in the middle of its first tariff cycle, with some exposure to political intervention as a differed portion of the 2017 tariff increase will be applied on an annual basis over the next 5 years. We consider that 2018 and 2019 tariff adjustments were in line with parameters set during the tariff review process, despite some judicial disputes during the process.

Also incorporated in the ratings is Sanepar's large capital expenditure program of BRL7.6 billion over the next 5 years, which is expected to absorb a large portion of the company's operating cash flow in the coming years, and the relatively high dividend payouts historically when compared to national peers. We note that Sanepar has a manageable debt schedule, with a long-dated maturity profile, with 55% of debt maturing beyond 5 years, and a good track record in accessing debt markets.

The Ba2/Aa2.br ratings for the proposed BRL350 million senior debentures due 2027-2029, despite their unsecured nature, are in line with Sanepar's CFR, reflecting Moody's view that the pledges attached to the secured portion of the company's debt obligations are reflective of relatively loose pledges on future flow receivables that do not bring additional recovery prospects upon default to their creditors relative to other debt instruments within the company's capital structure. Some of Sanepar's debt is backed by three-month reserve accounts or secured against future receivables which are dependent of the company's ability to operate as a going concern.

The proposed debentures will be senior unsecured debt obligations of Sanepar. They will include standard debt acceleration clauses among which a change of the company's control by the State of Parana (Ba2/Aa2.br), and inability to comply, for two consecutive quarters or two quarters within any four quarter period, with financial covenants consisting of Net Debt to EBITDA and EBITDA to Net financial expenses ratios set at 3.0x and 1.5x respectively.

RATING OUTLOOK

The stable outlook incorporates the view that Sanepar's credit metrics will remain adequately positioned for the Ba2 category, as reflected in FFO to Net Debt in the 37%-40% range and FFO interest coverage of 6.2x-6.6x.

WHAT COULD CHANGE THE RATING UP/DOWN

The company's credit profile is linked to that of the Government of Brazil (Ba2 stable), given the domestic nature of its operations, links to the local regulatory environment and some exposure to government interference. Therefore, positive rating pressure on the global scale is unlikely. That said, a longer track record of consistent application of a transparent and predictable regulatory framework and maintenance of strong credit metrics, such that FFO interest coverage and FFO/net debt remain above 6.5x and 40%, respectively, could lead to an upgrade of the ratings on the national scale.

On the other hand, a downgrade of the ratings could result from Moody's perception of a material change in the regulatory framework under which Sanepar operates or a disruptive political interference in the normal course of its business. A sustained deterioration in the company's credit metrics, such that FFO/net debt declines below 25% and FFO interest coverage moves toward 4.0x, or a deterioration in Brazil's sovereign credit quality could also lead to a downgrade.

Headquartered in Curitiba, in the State of Parana (Ba2/Aa2.br stable), Brazil, Sanepar was founded in 1963. As of September 30, 2019, Sanepar had more than 3.2 million water connections and more than 2.2 million sewage connections to provide treatment and distribution of water to more than 10 million consumers and sewage services to 346 municipalities. Of these municipalities, 345 are in the State of Parana, representing around 86% of the State's total municipalities, and one municipality in the State of Santa Catarina. Sanepar is controlled by the State of Parana, which owns 60.01% of the company's voting shares, and the remaining portion is in free float. In the twelve months ended in September 30, 2019, Sanepar reported net sales of BRL4.5 billion and net profit of BRL1.0 billion.

The methodologies used in these ratings were Regulated Water Utilities published in June 2018, and Government-Related Issuers published in June 2018. Please see the Rating Methodologies page on www.moodys.com.br for a copy of these methodologies.

Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1174796.

REGULATORY DISCLOSURES

Information sources used to prepare the rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's information.

Information types used to prepare the rating are the following: financial data, economic and demographic data, debt documentations, legislation, by-laws and legal documents, operating data, historical performance data, government policy documents, and regulatory filings.

Sources of Public Information: Moody's considers public information from many third party sources as part of the rating process. These sources may include, but are not limited to, the list available in the link http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1208432.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Please see the ratings disclosure page on www.moodys.com.br for general disclosure on potential conflicts of interests.

Moody's America Latina Ltda. may have provided Other Permissible Service(s) to the rated entity or its related third parties within the 12 months preceding the credit rating action. Please go to the report "Ancillary or Other Permissible Services Provided to Entities Rated by Moody's America Latina Ltda." in the link http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1212218 for detailed information.

Entities rated by Moody's America Latina Ltda. and the rated entities' related parties may also receive products/services provided by parties related to Moody's America Latina Ltda. engaging in credit ratings activities within the 12 months preceding the credit rating action. Please go to the link http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1212219 for a list of entities receiving products/services from these related entities and the products/services received.

The date of the last Credit Rating Action was 24/05/2018.

Moody's ratings are constantly monitored, unless designated as point-in-time ratings in the initial press release. All Moody's ratings are reviewed at least once during every 12-month period.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.br.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see ratings tab on the issuer/entity page on www.moodys.com.br for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com.br for further information.

Please see Moody's Rating Symbols and Definitions on the Ratings Definitions page on www.moodys.com.br for further information on the meaning of each rating category and the definition of default and recovery.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com.br for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com.br for additional regulatory disclosures for each credit rating.

Nicole Salum
Analyst
Infrastructure Finance Group
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 0 800 891 2518
Client Service: 1 212 553 1653

Michael J. Mulvaney
MD - Project Finance
Project Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 0 800 891 2518
Client Service: 1 212 553 1653

No Related Data.
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