SABESP Prices Its Notes Due 2020 - Analyst Blog

Sao Paulo, Brazil-based Companhia de Saneamento Basico do Estado de Sao Paulo (SBS), or SABESP, recently announced the pricing of its 6.25% Notes due 2020. The company will be issuing notes amounting to $350.0 million to qualified institutional investors outside Brazil. The proceeds of the notes issuance will be utilized to pay down SABESP's outstanding debts.

The company's major portion of debt is long term in nature and is from national and international credit agencies like the BID (Interamerican development bank), BNDES (Brazilian national development bank), IDB (Interamerican development bank), JBIC (Japan bank for international cooperation), Banco do Brasil (state-owned Brazilian Bank), etc. All together, loans from multilateral credit agencies represent around 70% of the company's total debt.

In the third quarter of 2010, SABESP's loans and financing, net of current portion soared 7.9% sequentially to R$6,496.3 million. In September, the company sought loan from Inter-American Development Bank (IBD) to finance the 3rd Phase of the Tietê Project, requiring an aggregate amount of US$800 million.

Another loan agreement with Japan International Cooperation Agency (JICA) was signed in October to finance the Environmental Improvement Integrated Program at Billings reservoir water source area (ProBillings).

Companhia de Saneamento Basico do Estado de São Paulo is the largest water and sewer service provider in the Americas and the third largest in the world. We believe SABESP stands well positioned to grow over the long run. The company aims at maintaining its water coverage ratio at 100% and improving its sewage ratio to 90% from 80% by 2018.

Moreover, in the near term, SABESP should benefit from the September 2010 tariff adjustment, a more relaxed monetary policy in Brazil, and its non-cyclical and relatively low risk business model.

The positive momentum, however, gets restricted by the company's aggressive investment policy, weaker cash generation, increasing financial burden from higher debt levels, and huge dependence on weather conditions. Despite the company's apparent weaknesses, we believe SABESP has the potential to excel in the coming quarters.

We currently maintain an Outperform recommendation on the stock.