TEXT-Fitch on Brazilian water utilities predictable cash flow, investments

Mon Nov 12, 2012 10:45am EST

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Nov 12 - The Brazilian water/wastewater sector faces the challenge to
achieve universal service provision through relevant investment without
compromising the credit profile of its operators, according to Fitch Ratings.
Positively, the low business risk, increasing demand and predictable operating
cash generation enable companies to tolerate higher leverages.

'The heavy investments required for the expansion of sector activities should
pressure the companies' cash flow during the next few years', said Gustavo
Mueller, Associate Director, in Fitch's Latin America group. 'Increasing
indebtedness to finance investments pose the challenge for the companies to
manage their leverage at adequate levels for the sector', added Mueller. The
water and wastewater industry benefits from specific long-term financing lines,
which favors the financial profile of its operators. An increasing access to the
capital market should provide additional investment funding opportunities.

The political risk is a concern for Fitch, mainly regarding tariff adjustments.
The track record of adequate adjustments noted by the agency in recent years has
been positive, which mitigates such risk. The enforceability of the sector's
regulatory model in 2010 was important jurisdictional support and set out rules
for the operations. The regulatory framework is yet untested. Its strengthen
combined with the development of local regulators and their ability to balance
the concession agreements, should provide stronger fundamentals for the sector's
businesses.

The water and wastewater sector's long-term expectations are favorable and the
search for universalized services should support the growth of operations.
Private operators have increased their interest in the sector and should expand
their market share, both through new concessions and through PPP contracts.
Private companies have higher cost control flexibility than the state companies,
and tend to report better operating margins.

For detailed information, please refer to Fitch's special report titled
'Water/Wastewater Utility: Challenges of Providing Universal Service' available
at www.fitchratings.com


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

Applicable Criteria and Related Research: Water/Wastewater Utility: Challenges
of Providing Universal Service
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