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03 Dec 2010
Approximately BRL 1.5 billion of debt instruments affected
Sao Paulo, December 03, 2010 -- Moody's Investors Service (Moody's) upgraded Companhia Energetica
de Sao Paulo's (CESP) corporate family rating to Ba1 from Ba2.
At the same time, Moody's upgraded CESP's Baseline Credit
Assessment (BCA) to 12 (mapping to Ba2) from 13 (mapping to Ba3).The
outlook is stable for all ratings.
This rating action affected the following debt instruments:
- USD 1.4 billion Unsubordinated Unsecured Medium-Term
- USD 184 million 10.25% Senior Unsecured Notes due
2011 issued under the MTN program
- USD 220 million 9.25% Senior Unsecured Notes due
2013 issued under the MTN program
- BRL 750 million 9.75% IPCA Linked Notes due 2015
issued under the MTN program
The upgrade of the issuer rating of the State of São Paulo to Baa3
from Ba2 prompted the rating action of the corporate family rating as
a result of the application of Moody's GRI rating methodology.
In accordance with Moody's GRI rating methodology, CESP's Ba1 corporate
family rating reflects the combination of the following inputs:
- Baseline credit assessment (BCA) of 12 (mapping to a Ba2)
- High dependence
- High government support
- The Baa3 rating of the State of São Paulo, which
has a stable outlook.
CESP is a Government-Related Issuer (GRI) in accordance with Moody's
rating methodology entitled "The Application of Joint Default Analysis
to Government-Related Issuers (GRIs)". Moody's methodology
for GRIs incorporates the company's stand-alone credit risk profile
or Baseline Credit Assessment (BCA) as well as the likelihood that both
entities would default at the same time and the probability that the controlling
shareholder would provide extraordinary support for the company's debt
obligations. The Ba1 GRI rating of CESP results from the application
of joint-default analysis of the company's BCA of 12, the
Baa3 rating for the State of Sao Paulo, Moody's view of high dependence
(the likelihood that both entities would default at the same time),
and high probability of extraordinary support from the controlling shareholder.
The upgrade of CESP's BCA to 12 from 13 is based on the agency's rating
methodology for Unregulated Utilities and Power Companies (published in
August 2009) and largely reflects the CESP's gradual and consistent
improvement of CESP's credit metrics in the past twelve months.
This has largely stemmed from the company's predictable cash flows
supported by its medium-term supply contracts primarily with the
regulated market, an evolving regulatory environment and manageable
refinancing risk given the company's continued focus on de-leveraging
its balance sheet.
Despite Moody's forecast of a continuous improvement in credit metrics
in the medium term, CESP's BCA rating is constrained by the potential
risks associated with cash disbursements in connection with existing contingent
liabilities, currency exposure and the renewal of CESP's primary
concessions in 2015.
The stable outlook reflects Moody's expectation that CESP will continue
to generate growing internal cash flow and further reduce debt in the
next 12 to 18 months. The major downside risks for this forecast
are higher than expected cash disbursements with contingent liabilities,
which Moody' s forecasts should not exceed BRL 300 million per annum,
or an unexpected prolonged dry season in the short term, which could
cause higher expenses with the acquisition of energy in the spot market.
The principal methodology used in this rating was Global Unregulated Utilities
and Power Companies published in August 2009.
What Could Change the Rating - Up
CESP's ratings could be upgraded if there is an improvement in CESP's
cash generation such that CFO Pre W/C to Debt remains above 20%
and cash flow interest coverage stays above 3.6x on a sustainable
basis and the uncertainties with respect to the scheduled expiration of
its concessions are reduced. A further upgrade of the issuer rating
of the state of São Paulo could also trigger a rating upgrade.
What Could Change the Rating - Down
CESP's ratings could be downgraded if there is a deterioration in CESP's
cash generation, such that CFO Pre W/C to Debt falls below 12%
and cash flow interest coverage declines below 2.0x for an extended
period of time.
The last rating action for CESP was on September 28, 2009 when Moody's
upgraded CESP's Baseline Credit Assessment (BCA) to 13 (mapping to Ba3)
from 14 (mapping to B1) and affirmed its Ba2 corporate family rating with
Headquartered in Sao Paulo, Brazil, Companhia Energetica de
Sao Paulo (CESP) is the country's fourth largest power generator with
an installed capacity of 7,456 MW and 3,916 MW of assured
energy. The government of the State of Sao Paulo is CESP's major
shareholder, with 94.1% of its voting capital and
36% of its total capital. During the last twelve months
ending on September 30, 2010, CESP posted net revenues of
BRL 2,822 million (approximately USD 1,530 million) and net
profit of BRL 29 million (approximately USD 16 million)
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit 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.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service 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
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's America Latina Ltda.
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
Moody's America Latina Ltda.
Moody's upgrades CESP's corporate family rating to Ba1; outlook stable
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
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