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Eletropaulo Met. De Elet. de Sao Paulo -- Moody's assigns Ba1/Aaa.br ratings to Eletropaulo's debentures

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Rating Action: Moody's assigns Ba1/Aaa.br ratings to Eletropaulo's debenturesGlobal Credit Research - 19 Apr 2021Sao Paulo, April 19, 2021 -- Moody´s América Latina ("Moody´s") assigned rating Ba1 on global scale and Aaa.br on the Brazilian National Scale to the proposed issuance of BRL720 million senior unsecured debentures by Eletropaulo Metropolitana de Eletricidade de São Paulo S.A. (Eletropaulo) with final maturity in 2031. The ratings outlook is stable.The assigned ratings are based on preliminary documentation. Moody's does not anticipate changes in the main conditions that the debentures will carry. Should issuance conditions and/or final documentation deviate from the original ones submitted and reviewed by the rating agency, Moody's will assess the impact that these differences may have on the ratings and act accordingly.RATINGS RATIONALEThe Ba1/Aaa.br ratings assigned are in line with Eletropaulo's corporate family ratings (CFR) and reflect our view that the new debentures rank equal to Eletropaulo's outstanding senior unsecured debt. The Ba1 rating also reflects a one-notch uplift from Eletropaulo's standalone credit profile given the strong likelihood of support from Enel Americas S.A. (Baa3 positive) as its controlling shareholder; due to the company's strategic importance to the group and structural linkages with the parent evidenced by acceleration clauses embedded in the parent's debt in case Eletropaulo fails to service debt.Eletropaulo shows stable cash flows and credit metrics that benefit from a robust service area for a distribution concession that expires in July 2028. The standalone credit quality is tempered by sizable capital investments to upgrade Eletropaulo's network before the end of the next tariff review cycle in 2023; large pension obligations and contingent liabilities, which constrain improvement in adjusted leverage despite the significant decrease in operational expenses since Enel Americas' acquisition; and its linkages with Brazil's credit fundamentals due to the regional characteristics of its customer base.As of December 31 2020, Eletropaulo's leverage as per Moody's standard adjustments -- which includes the debt with Centrais Eletricas Brasileiras SA-Eletrobras (Ba2 stable) and its pension obligations -- stood at 5.3x debt/EBITDA and 15.5% CFO pre WC/debt, significantly above its closely rated peers. Nevertheless, we understand that the company plans to continue to reduce its pension obligations with the migration of pension fund participants to the defined contribution plan from the defined benefit plan. In December 2020, a part of the fund's participants migrated to the new plan, resulting in a BRL918 million debt confession with Fundação CESP and BRL472 million pension expenses decrease. We expect the move to continue, in order to reduce Eletropaulo's debt burden and adjusted leverage. Eletropaulo's pension plan represents 50% of the company's Moody's adjusted debt.Eletropaulo presents a moderate liquidity profile, with cash on hand of BRL2.1 billion as of December 2020 and short-term debt maturities of BRL2.3 billion, as per Moody's standard adjustments (including the debt with Eletrobras). Of the total amount, around BRL890 million relates to debt raised last year to support the company's liquidity position amid the coronavirus pandemic and BRL707 million is linked to the maturity of the first series of the 23rd debentures issuance.The issuance proceeds will serve to finance capital expenditures. The debentures have a planned amortization schedule between 2029 and 2031, having three principal payments of around 33.33%, with principal amount expected to be adjusted by inflation (IPCA). The issuance is expected to have biannual interest payments starting in October 2021 at a fixed cost of 4.26% per year.Early amortization clauses are in line with Eletropaulo's previous issuances and include automatic acceleration in case of default of any obligation above BRL100 million and termination of concession before July 2028. The financial covenant for these debentures has been set at net debt/EBITDA of 3.5x, also in line with recent issuances. On December 31 2020, Eletropaulo reported net debt/EBITDA of 1.2x (as per covenant definitions, not including pension obligations) and we expect the company to remain in compliance with this threshold.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSGiven the highly regulated nature of the energy sector and its domestic operating profile, an upgrade of Brazil's sovereign bond rating (Government of Brazil, Ba2 stable) could trigger upward pressure on Eletropaulo's ratings. A rating upgrade would also take into account the company's liquidity position and business profile, and the regulatory environment in which the company operates. Quantitatively, an upgrade would require sustainable improvement in the company's credit metrics, such as CFO pre-WC to debt ratio consistently above 20%, and the cash interest coverage ratio close to 4.0x. In addition, our understanding of stronger support from Enel Americas, as evidenced by a direct or explicit corporate guarantee, could also cause upward pressure on Eletropaulo's credit profile.The ratings will face downward pressure if the stability and transparency of the regulatory regime for the distribution sector in Brazil weakens, ultimately resulting in more volatility or decreased visibility into Eletropaulo's cash flow base, causing sustainable declines in the company's credit metrics. Quantitatively, a downgrade would be considered if Eletropaulo's credit metrics consistently deteriorate, as indicated by a CFO pre-WC to debt ratio lower than 12.5% or a cash interest coverage lower than 2.25x on a sustainable basis. A downgrade on Enel Americas or on Brazil's sovereign bond ratings could also exert downward pressure on Eletropaulo's ratings. Moreover, a change in Eletropaulo's ownership structure, particularly if Enel Americas ceases to be a majority shareholder and/or ceases to consider Eletropaulo a significant subsidiary as per its debt clauses is likely to also trigger a rating downgrade.Eletropaulo operates the concession of the regulated electricity distribution in 24 municipalities in the Sao Paulo metropolitan area, including the city of Sao Paulo, serving 1,647 consumer units per square kilometer, with 18.3 million people, which corresponds to 8.5% of the total electricity consumed in Brazil. Eletropaulo has a 30-year concession contract that was granted by ANEEL, the Brazilian electricity sector regulator, in 1998. Since June 2018, Eletropaulo is controlled by the Enel Brasil S.A., a subsidiary of Enel Americas. On December 31 2020, the company posted net sales of BRL14.5 billion and EBITDA of BRL2.5 billion, as per Moody´s standard adjustments, which include pension obligations and the debt with Eletrobras.Headquartered in Santiago, Enel Americas holds interest stakes in several regulated utilities and power generation companies operating in Colombia, Peru, Brazil and Argentina. ENEL S.p.A (Baa1 stable) holds a 64.14% interest stake in Enel Americas.The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072530. Alternatively, please see the Rating Methodologies page on www.moodys.com.br for a copy of this methodology.Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. 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