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
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, Moody's information,
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_1215847
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_1215848
for a list of entities receiving products/services from these related
entities and the products/services received.
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.
Aneliza Crnugelj
AVP - 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