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Sao Paulo’s water utility was cut to junk by Moody’s Investors Service, which said the worst drought in decades had weakened the business and eroded the company’s liquidity.

Cia. de Saneamento Basico do Estado de Sao Paulo, known as Sabesp, was downgraded to Ba1, one level below investment grade, Moody’s said in a note Friday. The outlook on the rating is negative.

The utility, which is majority owned by the state government of Sao Paulo, has seen its sales volume crimped as costs climb due to its water-saving program, according to Moody’s. Sabesp’s credit metrics could worsen if it imposes a compulsory reduction in consumption, Moody’s said. Levels at Cantareira, the company’s main water reservoir, were at 15.8 percent of capacity Friday.

"Sabesp’s liquidity position will remain under pressure in the near term, particularly given the potential breach of some financial covenants embedded in most of the company’s outstanding debt," Moody’s analyst Jose Soares wrote.

Creditors could ask for immediate repayment if Sabesp breaches terms in two consecutive quarters or in two separate quarters within a period of one year, he wrote.

The 26 percent slump in the Brazilian real this year is also adding pressure to the ratings as about 40 percent of Sabesp’s debt is pegged to the U.S. dollar or the Japanese yen, it said.

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