Market Overview

Fitch Rates Brazilian Wastewater Project Aquapolo 'A-(bra)'; Outlook Stable

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SAO PAULO--(BUSINESS WIRE)--

Fitch Ratings has assigned (effective Sept. 1, 2011) a National Long-Term Rating of 'A-(bra)' to the first debenture issuance of Aquapolo Ambiental S.A. (Aquapolo). The Rating Outlook is Stable. The debentures will be issued in one single tranche in the amount of BRL326.7 million, bearing interest at the Reference Rate (TR) plus 8.75%, with a maturity of 18 years. The proceeds of the issuance will be secured by the assets of the Aquapolo project, a system to produce and supply recycled water for industrial purposes, destined for Petrochemical Pole in the State of Sao Paulo.

Key Rating Drivers

Stable and Predictable Revenue: The project has stable and predictable revenue based on a take-or-pay agreement with a variable price structure based on the volume delivered. The contract matures in 2053. The take-or-pay clauses and the price structure sustain the stability of revenue during the life of the debt.

Credit Quality of the Project's Offtaker and Supplier: The sole offtakers and suppliers of the project are Braskem S.A. (Braskem, Fitch Local and Foreign Currency Long-Term Issuer Default Ratings 'BB+' and National Long-Term Rating 'AA(bra)'), and Companhia de Saneamento Basico do Estado de Sao Paulo (Sabesp, Fitch Local and Foreign Currency Long-Term IDRs 'BB' and National Long-Term Rating 'A+(bra)'). The ratings are supported by the good credit quality of the two companies.

Risk of Secondary Water Quality Degradation: The project will pump treated secondary effluents of the WWTP (waste water treatment plant) through a membrane bioreactor/reverse osmosis unit to adapt the water supplied to meet rigorous quality standards. In the effluent supply contract, Sabesp commits itself to guarantee the quantity needed and a specific quality standard for the secondary effluent. Furthermore, the penalties and/or the reduction in billing for a sub-standard product are transferred to Sabesp.

Project Completion Risk: This risk is mitigated by the experience of the construction company, Construtora Norberto Odebrecht S.A. (CNO), in the execution of similar projects, by the adequate contractual terms involving the contractor and by obtaining all of the environmental licenses and right-of-way authorizations obtained by the project.

The Sponsors' Lack of Previous Experience: The analysis contemplated the sponsors' lack of experience in membrane technology (tertiary treatment). Meanwhile, the project benefits from the participation of the equipment supplier (KMS) in the project phases, as well as performance and equipment guarantees from KMS.

Life Cycle of the Project Costs: In addition to the life cycle of the project costs, Fitch took into consideration the absence of a MMRA (Major Maintenance Reserve Account), which results in tight debt service coverage ratios (DSCRs) during the ramp-up period and in the membrane replacement years.

What Could Trigger a Rating Action

--Unexpected reductions in capacity due to higher than expected expenses during the major maintenance periods;

--Deterioration in the credit profile of Braskem or Sabesp;

--Better than expected operational and financial performances.

Security

The debentures are senior and guaranteed by fiduciary assignment of the off-take agreement receivables, the rights eventually arising from the construction contract, the secondary water supply contract and the insurance policies, as well as fiduciary alienation of the issuer's shares and fiduciary assignment of the funds to be deposited in the accounts linked to the operation.

Transaction Summary:

Aquapolo is a special purpose company formed by Foz do Brazil (51%) and Sabesp (49%) to design, raise financing, build, own, and operate the new facilities. The project entered its construction phase on April 1, 2010 and is expected to take two years. To date, progress on the project is 48.3% complete. Some of the main construction risks are related to the water pipeline, due to its extension and route, which is very close to developed areas, avenues and rivers. Additional risk is caused by the lack of a contractual buffer for eventual delays between the completion date and the commercial operating date of Aug. 1, 2012.

For more information, please see Fitch's report on Aquapolo which is available at 'www.fitchratings.com'.

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

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (Aug. 16, 2011).

Applicable Criteria and Related Research: Aquapolo Ambiental S.A.

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=650712

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648832

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Fitch Ratings
Primary Analyst
Luciana Nazar, +55 11 4504-2600
Director
Fitch Ratings Brasil Ltda, Rua Bela Cintra,
904/ 4 andar - Sao Paulo - CEP: 01415-000
or
Secondary Analyst
Pagsi Jimenez, +55 11 4504-2600
Director
or
Committee Chairperson
Alberto Santos, +1-212-908-0714
Senior Director
or
Media Relations:
Cindy Stoller, +1-212-908-0526 (New York)
cindy.stoller@fitchratings.com

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