Sao Paulo, March 18, 2020 -- Moody´s América Latina Ltda., ("Moody´s")
assigned a Ba2 global scale and a Aa3.br Brazilian national scale
Corporate Family Rating (CFR) to Igua Saneamento S.A. ("IGUÁ",
or "the company"). The outlook is stable. This is the first
time Moody's rates this company.
RATINGS RATIONALE
The Ba2/Aa3.br corporate family ratings (CFR) reflect the company's
solid business profile with a diversified customer base and good revenue
visibility through relative low demand elasticity and long term contracts.
Also, we see the public private partnerships ("PPP")
business representing a significant portion of revenues with contractual
arrangements that mitigate revenue risk.
The continued improvement in the company's capital structure and
liquidity profile is also reflected in the ratings as we consider IGUÁ
will remain focused on the de-leveraging and the operational turnaround,
by improving its margins and water losses as well as resuming the connections
growth. The recent capital injections performed in the last two
years are also a sign of support from the shareholders together with the
commitment to retain dividend payments until 2023. The successful
conclusion of its refinancing plan in 2020, lengthening the debt
profile and maintaining timely access to the debt markets are also embedded
in our projections.
Nonetheless, IGUÁ´s portfolio is less diversified and
smaller than its peers, with significant revenue concentration since
the four largest operations (Cuiabá, SPAT, Paranaguá,
Agreste) respond for about 70% of the group´s revenues.
Also, the Sistema Produtor Alto Tietê - SPAT contract
maturity in 2024, if not renewed, could weigh on the group´s
EBITDA since this is a mature cash-cow generator. IGUÁ's
weak credit metrics as shown in Funds from Operations (FFO) to net debt
of 3.3% and FFO interest coverage of 1.3x in 2019
combined with significant capex needs of BRL300-400 million per
year in the next 12-18 months also weigh on the ratings.
New investments and acquisitions could negatively impact IGUÁ´s
credit quality as well as material delays or costs overruns in the capital
investment program. While Moody's acknowledges the relatively low
complexity of investments associated with the expansion of water and wastewater
network, the agency believes its implementation will continue to
represent a challenge for the company's management for the foreseeable
future. The company business is exposed to political intervention
in some of the areas of concession, although somewhat mitigated
by the revenue diversification and the Government of Brazil´s rating
(Ba2 stable), given the domestic nature of the company's operations.
The stable rating outlook reflects our expectation that IGUÁ will
be successful in improving its operating performance and implementing
its capex plan with minimal cost overruns such as to bring FFO Interest
coverage towards 2.0x and FFO to Net debt above 9% over
the next 12 to 18 months. It also considers the company will remain
compliant within the covenant thresholds embedded in the outstanding debentures.
Moody's views IGUÁ´s liquidity profile as adequate.
In 2019 the company had BRL277 million available in cash & equivalents
which compares to BRL217 million in debt maturities due in the short term.
IGUÁ has a long dated debt maturity profile with approximately
84% of the total debt maturing in the long term. Despite
negative free cash flow generation as a result of the significant capex
plan Moody's expects IGUÁ will continue to have good access to
debt and capital markets such as to cover upcoming debt maturities in
a timely manner.
WHAT COULD CHANGE THE RATING UP/DOWN
An upgrade of the ratings could be considered upon faster-than-anticipated
improvements in operating cash flow generation and reduction in leverage
such that FFO Interest coverage moves above 2.0x and FFO to Net
debt above 14% on a sustainable basis. An upgrade would
also require the company maintaining a solid liquidity profile and conservative
financial policy.
On the other hand, deterioration in the company's operating performance
and/or significant capex overruns such that FFO Interest coverage and
FFO to Net debt ratios remain below 2.0x and 9% respectively
by 2020 could result in a ratings downgrade. Perception of a more
aggressive financial policy and/or a deterioration of Brazil sovereign
credit quality could also exert negative pressure on the ratings.
Igua Saneamento is the third largest private water utility company in
Brazil by population served, operating 18 long-term water
and wastewater assets with an average 20 years remaining concession period,
14 of which through concession agreements and 4 through public-private
partnerships (PPP). The company attends 6 million inhabitants in
18 municipalities across 5 states. Since 2017 the company is controlled
by IG4 Capital and Alberta Investment Management Corp. (AIMCo),
alongside with the BNDESPAR and Cyan. In 2019 the company had BRL508
million in net revenues and BRL236 million in EBITDA according to Moody's
standard adjustments.
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
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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:
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Aneliza Crnugelj
AVP - Analyst
Infrastructure Finance Group
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
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Michael J. Mulvaney
MD - Project Finance
Project Finance Group
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