TEXT-Fitch cuts Abertis Infraestructuras S.A. to 'BBB+'
(The following statement was released by the rating agency)
Aug 31 - Fitch Ratings has downgraded Abertis Infraestructuras, S.A.'s (Abertis) Long-term Issuer Default Rating (IDR) and senior unsecured notes to 'BBB+' and removed them from Rating Watch Negative (RWN), where they were placed on 8 June 2012. The agency has affirmed the Short-term IDR at 'F2'. The Outlook on the Long-term IDR is Negative. The downgrade primarily reflects Fitch's view that business risk associated with Abertis has heightened, as its recourse EBITDA has come under increasing pressure and it has become increasingly dependent on subordinated dividends from non-recourse investments. The Negative Outlook reflects the company's exposure to any deterioration in Spain's rating resulting from a further weakening of the Spanish economy. Abertis' ability to manage leverage and liquidity over the past couple of years has largely relied upon its ability to divest itself of non-recourse-funded assets regardless of the operating performance of its core recourse-funded toll road, telecoms and airports businesses. While a portion of asset disposal proceeds have been used to delever its corporate balance sheet, funds have also been used to expand its non-recourse asset portfolio. Fitch considers the company is becoming more dependent on dividend flows from such non-recourse businesses to support its recourse operating cash flows, with current management forecasts expecting 17%-21% of aggregate recourse EBITDA plus dividends from non-recourse businesses comprising such dividends over 2011-15 (12-14% forecast last year for the period 2011-2014). Fitch considers holding companies that rely on dividend flows from investments to entail greater business risk than pure infrastructure operating companies for the following reasons: - All else being equal, dividend flows from holdings in non-recourse business interests are generally less predictable than infrastructure company operating cash flow; - It is more difficult to predict the evolution of a company that trades holdings in other companies, as investment strategies can change quickly; and - Regardless of the stability of the underlying business operating performance, holding company performance may be more closely related to the price at which investments in such businesses are traded, and so the holding company's cash flow may not directly benefit from the inherent resilience of the underlying infrastructure assets. Abertis' recourse cash flow is exposed to Spanish economic conditions. All recourse toll roads (64% of recourse revenue) and telecoms (22%) investments are located in Spain, and only its recourse airport businesses (14%) do not have operating exposure to the country. In particular, traffic on its toll roads has declined by 24% since the start of the global economic downturn in 2008, and Fitch expects further declines as the Spanish economy continues to stagnate. To date, Abertis has been able to levy increased tariffs and manage operating and capital expenditure for the roads to maintain stable or growing EBITDA, despite the harsh conditions. However, Fitch expects that the company's flexibility to manage costs will be reduced going forward. Approximately 42% of 2012 recourse revenue is forecast to be derived from the Aumar and Acesa toll road concessions, whose concession terms are due to end in 2019 and 2021, respectively. Overall, the weighted average concession life of Abertis' recourse toll roads is 11 years, significantly shorter than other major European toll road operators (Atlantia S.p.A: 26 years remaining and Brisa Concessao Rodoviaria, S.A.: 23 years remaining), although other of its recourse assets are owned on a perpetual basis. Fitch understands that Abertis is currently considering its options for these assets. Unless Abertis' recourse asset base is strengthened, it will be imperative for the company to continue reducing recourse leverage significantly over the coming years to prevent further negative rating action. In addition to the company's intrinsic developments, which are the key drivers for the ratings, Fitch believes the Spanish sovereign rating needs to be taken into account and monitored. When placing Abertis' ratings on Rating Watch Negative on 8 June 2012, the agency noted that to assess the impact of the downgrade on the Republic of Spain's rating to 'BBB'/Negative/'F3' on 7 June 2012, it would assess four key factors: - The impact on Abertis's Spanish business of the weakening Spanish economy; - The company's ongoing acquisition and divestment activity on its operating and financial profile; - Its ability to manage refinancing and liquidity risk over the next two years; - Its ability to deleverage in line with Fitch's previous assumptions. Fitch's special report entitled "Rating Impact of Euro Sovereign Downgrades on Project Debt," (dated 19 July 2011 at www.fitchratings.com) explicitly sets out the conditions determining whether an infrastructure company's debt rating could be considered linked to that of the sovereign state in which the project is located. These include direct counterparty exposure to the sovereign; reliance on domestic capital and banking markets; operating exposure to the country's economic conditions; and the risk of the sovereign taking unilateral measures detrimental to the company. Beyond its operating exposure, Abertis' exposure to Spain is limited: its liquidity profile over the next two to three years is strong, even when discounting support provided by Spanish banks. Fitch calculates that debt maturities arising beyond the end of 2014 are fully covered on this basis. Furthermore, although the Spanish government is a counterparty to Abertis with respect to a compensation payment agreed for traffic underperformance on the AP-7 toll road, Fitch expects this to be paid from proceeds raised from the re-tendering of the Acesa concession at maturity in 2021, when the compensation payment is due, thereby removing the company's direct exposure to the government's balance sheet. Considering the limited nature of Abertis' current exposure to Spain, Fitch has concluded that Abertis' rating should not be explicitly linked to the Spanish sovereign rating, which may be affected by numerous factors not relevant to Abertis. Nevertheless, if Spain's ratings were downgraded due to a further weakening of Spanish economic conditions, it would likely lead to another downgrade of Abertis' ratings. Given the current Negative Outlook on the sovereign's rating, Fitch considers a Negative Outlook on Abertis' rating to be appropriate. Fitch stated in November 2011 when it affirmed Abertis' ratings that an increase in leverage, measured as net debt to recourse EBITDA plus dividends, to above 5.0x would lead to a negative rating action. Since then, in light of weaker economic conditions in Europe generally, in the context of the shortening life of Abertis' recourse toll road concessions, and given the company's increasing dependence on dividends from non-recourse investments, Fitch has revised its view. Should the company's leverage increase to above 4.0x over the next two to three years without increasing the size and quality of its recourse asset base, then a further negative rating action may result. Conversely, if the company is able to strengthen its recourse asset base, if economic conditions in Spain stabilise and recourse toll roads experience a stabilisation in operating performance and if the company is able to maintain leverage in line with the Fitch rating case, reducing it to around 3.0x over the next two to three years, then this could lead to a positive rating action. (Caryn Trokie, New York Ratings Unit)
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