SABESP’s 5th Promissory Notes Issue – Analyst Blog

São Paulo, Brazil based public water and sewage services provider, Companhia de Saneamento Básico do Estado de São Paulo, or SABESP’s (SBS) board of directors approved a 5th Promissory Notes issue amounting to R$600 million. Funds raised through the issue will be utilized to meet obligations due in 2010 and 2011.

The notes issue will be principally conducted by HSBC Corretora de Títulos e Valores Mobiliários S.A. and other underwriters including BB – Banco de Investimento S.A. and Santander Corretora de Títulos e Valores Mobiliários S.A.

The promissory notes will be offered to a maximum of 50 qualified investors and subscribed by a maximum of 20 qualified investors. SABESP intends to repay the promissory notes, which mature in 180 days from the date of issuance, by raising funds through issue of debentures.

At the end of first quarter of 2010, SABESP had loans and financing totaling to R$5,610.1 million (US$3,116.7 million), compared with R$5,549.4 million at the end of the previous quarter. For the fiscal year 2010, SABESP plans to invest roughly $1.8 billion in water and sewage and to fund this huge capex program, it intends to use internal resources as well as borrow from financial institutions.

SABESP’s rising debt level remains a cause of concern as it increases the financial burden of the company. At the end of the first quarter of 2010, total debt to EBITDA ratio was 2.4x and short-term debt-to long-term debt was 14.6%. Besides, weak cash generation in the first quarter 2010 and the company’s huge dependence on weather conditions and electricity, as the prime source of energy, act as negative catalysts.

Despite these negatives, the company over the past few quarters has been posting good financial results. In the first quarter of 2010, its reported net income grew 13.4% to R$290.6 million (US$160.6 million), compared with R$256.2 million in the year-ago quarter. Reported EPS was R$1.28 (US$1.41) versus R$1.12 in the first quarter of 2009 and above the Zacks Consensus Estimate of $1.31. 


We currently maintain our Neutral recommendation on the stock, supported by Zacks #3 (Hold) Rank.