GMO's Grantham and Elliot Managements Paul Singer have established sizeable positions in SBS. Both have great records as value investors. Why? The cyclically adjusted PE (earnings averaged over a 10 yr period is 2.65 vs approximately 10 times higher (about 25) for the US. Noble Laureate Prof. Schiller is ringing the bell about this issue.
The market concensus is that Brazil is untouchable and that may be true for most of the Brazilian market. However, despite Moody's proclamation today, SBS's debt is very manageable. About $41 million (at 7.5%) comes due at the end of next year. The bulk of the debt $350 million does not come due until December 2020 (6.25%). Only 40% of the debt is denominated in non local currency (Japan being the largest non-Brazilian holder of debt-Japan also has a weak currency). Japan is embarked on QE which should further weaken their currency. Therefore, loans made in yen terms should not hurt SBS due to the weakening Real.
Moody's claims that SBS is not investing adequately in the water reservoirs and distribution systems. Yet this ignores the programs to reduce leakage/pilferage (by next yr it should be less than 28%) down from 40% in 2011. Much of this is Municipalities that have not paid and are in collections. Leakage from pipes are being repaired/replaced. A large river diversion project is under construction that will provide 5 m3/s of additional supply to the critical reservoirs. Look at "SBS and Sao Paulo Water distribution system in Wikipedia". While wikipedia may sometimes contain errors they provide links to referenced sources. SBS has received two Tariff increases in the past year to deal with the costs of the drought. So the evidence shows that Sao Paulo is moving to support capital improvements to the water supply system.
In other words Moody's seems to have an agenda with their credit downgrade and comparisons to the LA water works. They were at the crux of the 2008 real estate credit buble, so I don't think they should be considered creditable.
The currency crisis similarities to 1998 are striking (i.e., attributed to emerging markets). Review the charts and observe how SBS rebounded from the 1998 crisis. It far outperformed the S&P or the QQQ's. The currency weakness is a function of two factors 1) China slowdown and commodity weakness but even more importantly is that it is a side effect of QE. The evidence of this is that even emerging markets that are not commodity dependent (i.e., Turkey, Korea, Thailand, etc) have all experienced significant currency weakening. To me it looks like Moody's agenda is steming capital flight. Currency strengthening and weakening changes used to occur slowly. Now a year or more change may occur overnight. Witness the 20% overnight change earlier this year when the Swiss Franc unpegged from the Euro. These type of changes may make it extremely difficult to be nimble enough to establish a position once a major shift occurs.
Enough of a diatribe.
FL
