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Rating Action:

Moody's assigns Ba2/Aa2.br ratings to Sanepar's proposed BRL 250 million unsecured debentures due in 2021-23, outlook is stable

 The document has been translated in other languages

24 May 2018

Sao Paulo, May 24, 2018 -- Moody´s América Latina Ltda., ("Moody´s") has assigned a Ba2 global scale rating and a Aa2.br national scale rating to the senior unsecured debentures due in 2021 and 2023 totaling BRL250 million, to be issued by Companhia de Saneamento do Parana -- SANEPAR ("Sanepar" or "the company"). Proceeds from the issuance will be used to fund capital expenditures and working capital needs. Sanepar's Ba2/Aa2.br corporate family ratings (CFR) are unaffected. The outlook for the ratings is stable.

The assigned ratings are based on preliminary documentation received by Moody's as of the rating assignment date. Moody's does not expect changes to the documentation reviewed over this period nor does it anticipate changes in the main conditions that the debentures will carry. Should issuance conditions and/or final documentation of the debentures 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

The Ba2/Aa2.br ratings for the proposed BRL 250 million debentures due 2021-23 reflects (i) Sanepar's well positioned concession area, with long-term concession contracts providing more visibility over cash flow generation in the long-run; (ii) Sanepar's strong and resilient credit metrics, with FFO/Net debt and FFO Interest coverage expected to be above 40% and 5.0x, respectively supported by the application of annual tariff increases as part of the 2017 tariff review process ; and (iii) its adequate liquidity position and the good access to debt market to fund its large capital expenditure program, especially with CEF and BNDES lines which have long tenor and competitive interest costs

The assigned ratings also take into consideration (i) Sanepar's large capital expenditure program which is expected to absorb a large portion of the company's operating cash flow in the coming years, (ii) relatively high dividend payouts historically when compared to national peers, and (iii) risk of political intervention as future operating performance will rely on the effective application of a postponed portion of the 2017 tariff increase on an annual basis over the next 6 years. The stable outlook reflects the stable outlook on Brazil's government bond rating and our view that Sanepar's creditworthiness is highly dependent on the credit quality of the sovereign.

The proposed debentures will be senior unsecured debt obligations of Sanepar. They will include standard debt acceleration clauses among which the non-payment by the company of any financial obligation above BRL 30 million, a change of the company's control by the state of Parana, 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.

Despite their unsecured nature, the ratings of the proposed debentures 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 do not bring sufficient benefit to their creditors relative to other debt instruments within the company's capital structure. Some of Sanepar's debt is backed by reserve accounts which are small in size (3 months) or secured against future receivables the execution of which is dependent on the company's ability to operate as a going concern basis. Cross default mechanism also aligns probability of default across all of the company's debt instruments.

Sanepar's operating performance has shown continuing growth over the recent quarters, mainly driven by the 8.53% tariff adjustment applied from June 2017, and to a certain extent by increases in the number of connections for water and sewage services. After growing 11% and 18% respectively in 2017, revenue and EBITDA grew by another 8% and 24% in Q1 2018, despite a 4.5% year on year decline in water consumption as a result of atypically high volume of rain and lower temperatures in the concession area during the quarter. Going forward Moody's expect that Sanepar will continue to improve its operating performance, driven by (i) the expansion of its sewage network, (ii) the company's continuing focus on cost-saving measures, and (iii) the positive impact of the tariff revision announced by the regulator in February 2017.

Moody's considers Sanepar's liquidity as adequate. As of March 31, 2018, the company had around BRL 549 million available in cash, compared with BRL 570 million of debt maturities over the next twelve months. The company also has a long dated maturity profile, with 53% of debt maturing beyond 5 years, and good track record in accessing debt markets on a timely basis.

What Could change the rating Up/Down

An upgrade of Brazil's sovereign bond rating, together with the consistent application of a transparent and predictable regulatory framework, and sustained improvements in Sanepar's credit metrics, such that FFO interest coverage and FFO/net debt remain above 6.0x and 45%, respectively, could lead to an upgrade of the ratings.

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 35% 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 March 31, 2018, Sanepar had more than 3.1 million water connections and more than two 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 60.1% of the company's voting shares, and the remaining portion is in free float. The company also has preferred shares that are spread out among the Government of Singapore (Aaa stable) (3.4%), Bank of Nova Scotia (A1 negative) (2.7%), SPX Falcon (2.0%), municipalities (0.7%) and other holders of listed shares (91.2%). In the twelve months ended March 31, 2018, Sanepar reported net sales of BRL3.9 billion and a net profit of BRL713 million.

The methodologies used in these ratings were Regulated Water Utilities published in December 2015, and Government-Related Issuers published in August 2017. 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 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 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/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 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/viewresearchdoc.aspx?docid=PBC_1123624 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/viewresearchdoc.aspx?docid=PBC_1123625 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 10/4/2018.

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.

Paco Debonnaire
AVP - Analyst
Project 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.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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