Fitch: End of Sabesp's Tariff Bonus Program Eases Cash Flow Pressure

RIO DE JANEIRO--(BUSINESS WIRE)-- Fitch Ratings views as credit positive today's regulatory approval for Sabesp to end its water reduction incentive program and contingency tariff policy effective in May 2016. The measure should alleviate pressures on the company's EBITDA and cash flow generation. During 2015, the net impact on Sabesp's cash flow from the incentive program and contingency tariff was negative at BRL426 million.

Fitch believes suspension of the tariff bonus and onus (contingency) policies is also favorable as it should revive Sabesp's cash flow predictability, which has been historically key to its financial profile. The absence of these policies should increase the company's EBITDA generation compared to 2015 results and strengthen its financial profile to face the current challenging macroeconomic environment and refinancing concerns within a more restrictive credit market access.

According to Fitch's updated forecast, the company should report by the end of 2016 adequate net leverage in the range of 2.8x-3.0x, assuming an FX ratio between BRL/USD 3.50-4.00, suspension of the bonus and contingency tariff policy at the end of April 2016, and stable volume billed. This scenario falls between Fitch's optimistic and base case assumptions included in Fitch's Scenario Analysis Report for Sabesp, published on March 22, 2016. As the company's operating performance and FX behavior is closer to Fitch's optimistic assumptions, Sabesp's risk of covenants breach reduces.

Sabesp's challenge for 2016 is to refinance part of its relevant short-term debt of BRL1.5 billion, which includes BRL901 million linked with FX debt, mainly regarding its USD140 million bonds maturing in November 2016. The company's satisfactory liquidity of BRL1.6 billion by the end of 2015 and proven access to debt markets should partially mitigate refinancing concerns.

Fitch expects Sabesp's capex during 2016 of around BRL2.0 billion and dividend payments to pressure the company's FCF into slightly negative figures. Fitch currently rates Sabesp 'BB'/'AA-(bra)'/Outlook Stable.

Additional information is available at 'www.fitchratings.com'.

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Fitch Ratings
Gustavo Mueller
Associate Director
+55 21 4503-2632
Fitch Ratings Brasil Ltda.
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Rio de Janeiro - RJ - CEP: 20020-010
or
Mauro Storino
Senior Director
+55 21 4503-2625
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
[email protected]

Source: Fitch Ratings

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