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Rating Action:

Moody's assigns Ba2/Aa1.br ratings to AEGEA´s up to BRL 600 million new debenture issuance; stable outlook

 The document has been translated in other languages

29 Jun 2018

Sao Paulo, June 29, 2018 -- Moody's America Latina Ltda. (Moody's) assigned Ba2/Aa1.br (respectively, in Moody´s global scale and Brazil´s national scale) to AEGEA Saneamento e Participacoes S.A.´s ("AEGEA" or "the company") new debenture issuance of up to BRL 600 million (3rd issuance) due in 2025. The outlook is stable.

The senior unsecured non-convertible debentures have two tranches. The first has three customized principal payments from 2021-2023 and semi-annual interest payments staring after issuance while the second has two annual payments in 2024-2025 and annual interest starting in 2019. AEGEA will use the issuance proceeds to fund its investment needs, repay debt and improve cash liquidity. The debentures have cross default provisions with other outstanding debt from the company as well within the group and contains a Net Debt to EBITDA financial covenant that must be equal or lower than 3.5x, verified on a semi-annual basis, which could trigger debt acceleration, among other clauses.

The debenture´s Ba2 rating factors in a one notch down structural subordination from AEGEA´s Corporate Family Rating (Ba1) since AEGEA does not hold any operations and is strictly a vehicle for controlling stakes on the operating subsidiaries. AEGEA largely depends on the regular payment of dividends up-streamed by its operating subsidiaries to meet its obligations, equity investment commitments and potential cash requirements related to its guarantees. The debenture´s Aa1.br national scale rating reflects the standing of the company's credit quality relative to its domestic peers.

RATINGS RATIONALE

AEGEA´s ratings reflect its stable business profile, the company's solid positioning and relatively strong pricing power. The company benefits from very limited competition. Very diverse operations result in lower exposure to water scarcity problems shown by overall lower volume fluctuations and stable cash flows. AEGEA´s tariff mechanism and regulatory framework are overall transparent and predictable with annual tariff adjustments to pass through inflation. Expansion targets, quality standards and capital investments are all pre-settled under the company's concession contracts.

AEGEA's management team is experienced and the company's shareholders show sound corporate governance practices in our view, further supporting the ratings. We understand that shareholders will continue to actively support the company's credit quality and liquidity. Moody's also expects that AEGEA will continue to have sound access to the banking and capital markets and will prudently manage its leverage, maintaining discipline on its financial policy and mitigating cross-currency exposure risks from the Note´s issuance.

Another consideration for the ratings is the fact that AEGEA operates in various jurisdictions with different granting authorities. Moody's notes that Brazil´s water/sanitation regulatory framework is relatively new and under development. The ratings are tempered by AEGEA´s relative small scale and significant expansion plan that together with a track record of high dividend payments will continue to pressure leverage. New investments and acquisitions could negatively impact the company´s credit quality as well as material delays or costs overruns on the capital investment program.

The stable outlook follows the outlook on Brazil, given the domestic nature of the company's operations and, consequently, its links to the local economic/regulatory environment, and ultimate credit quality. It also considers the company will prudently manage its leverage in line with the current credit quality, as well as maintain discipline in its financial policy and count on shareholder support if needed.

What Could Change the Rating - Up /Down

We do not expect a rating upgrade in the short to medium term given the stable outlook albeit an upgrade of Brazil´s rating could trigger upward pressure on the company´s ratings given the intrinsic linkages of AEGEA and the Brazilian sovereign. Also, better than anticipated financial performance such that FFO interest coverage stays above 3.0x and Debt to Capitalization below 55% on a sustained basis could also trigger upward rating pressure, however such upward pressure is somewhat limited to the sovereign credit quality.

On the other hand, deterioration in the sovereign's credit quality could exert downward pressure on AEGEA ratings as well as Moody's assessment of weaker shareholders support. New investments and acquisitions or further increase of the already significant capital spending plan could also affect AEGEA´s current credit quality downwards. The ratings could also be downgraded if there is a significant and sustained deterioration in the company´s credit metrics and liquidity or if there is a deterioration in its subsidiaries performance or ability to upstream dividends. Quantitatively, the ratings could be under downward pressure if FFO interest coverage stays below 2.0x and Debt to Capitalization above 75% on continued basis. AEGEA has cross-default clauses within the group and operates through a centralized cash management system.

The ratings could be revised downwards if there are material delays or costs overruns on the capital investment program that negatively impact revenues or lead to non-compliance with the contractual targets. Our perception of deteriorated stability and transparency of the regulatory regime would also add pressure to the ratings as if volumes stay consistently below Moody's forecast.

AEGEA is a holding company with 42 subsidiaries operating long term water and sewage contracts and 4 PPP sewage contracts in various municipalities across ten Brazilian States. The company recently acquired a new concession through Companhia de Saneamento do Norte, increasing its service coverage to around 7.6 million customers from 5.4 million and also acquired a PPP with Guarulhos municipality that has 1.3 million inhabitants.

In the LTM ended March 2018, AEGEA posted net revenues of BRL1.3 billion and EBITDA of BRL780 million, while the FFO interest coverage was 2.7x and Debt to Capitalization 72%, as per Moody's standard adjustments.

AEGEA started operations in 2010 and is one of the largest private water utilities in Brazil, with around 37% of Brazil's market share. AEGEA's shareholders are Equipav (not rated, 67.2% stake), the Government of Singapore's Investment Corporation "GIC" (not rated, 21.4% stake) and the International Finance Corporation - IFC (Aaa, 11.4% stake).

The principal methodology used in these ratings was Regulated Water Utilities published in June 2018. Please see the Rating Methodologies page on www.moodys.com.br for a copy of this methodology.

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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1113601.

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, operating data, historical performance data, public information, and Moody's information.

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/viewresearchdoc.aspx?docid=PBC_193459.

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 rating has 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_1127644 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_1127651 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 20/6/2018.

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 or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

Aneliza Crnugelj
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: 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: 800 891 2518
Client Service: 1 212 553 1653

No Related Data.
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