TEXT-S&P affirms Cassa Depositi e Prestiti at 'BBB+/A-2'
Overview -- We consider there is an "almost certain" likelihood that the Italian government would provide timely and sufficient extraordinary support to Cassa Depositi e Prestiti SpA (CDP) in the event of financial stress. -- We are affirming the long- and short-term issuer credit ratings on CDP at 'BBB+/A-2'. -- The outlook remains negative, reflecting the negative outlook on the Republic of Italy. Rating Action On Nov. 14, 2012, Standard & Poor's Ratings Services affirmed its 'BBB+/A-2' long- and short-term issuer credit ratings on Cassa Depositi e Prestiti SpA (CDP). The outlook remains negative. Rationale The ratings on Italy-based lending institution, Cassa Depositi e Prestiti SpA (CDP), are based on an equalization with the unsolicited long-term sovereign credit rating on the Republic of Italy (BBB+/Negative/A-2), reflecting our opinion that there is an "almost certain" likelihood that the Italian government would provide timely and sufficient extraordinary support in an event of financial stress. In accordance with our criteria for government-related entities, our rating approach is based on our view of CDP's: -- "Critical" role through its public policy mandate. CDP is the main finance provider for national and local infrastructure projects undertaken by regional governments, local authorities, and public-law entities. CDP's exposure to state risk on the asset side is substantial, accounting for about one-half of its loan portfolio. -- "Integral" link with the Italian government. The government is legally required to be the majority state owner, and provides an explicit guarantee on the vast majority of CDP's obligations. The Italian state also exercises operational and management control and tight supervision over the CDP. In its "segregated activity" (SA), CDP provides loans to state, local, and regional governments and public-law entities for the financing of capital investments. This is CDP's traditional, publicly mandated lending activity, accounting for 95% of the loan book as of end-June 2012. CDP refinances SA loans through sovereign-guaranteed postal savings instruments, capturing the savings of the general public, as well as through covered bonds. The vast majority of CDP's liabilities are made up of these postal savings instruments. Since 2009, a number of regulatory changes have widened the scope of projects eligible for funding through CDP's SA to include, among others, operations undertaken in conjunction with and co-financed by EU member states and institutions, projects carried out via public-private partnerships, financing of small and midsize enterprises through commercial banks, and the provision of additional support for exporters. In 2010, CDP amended its articles of association to allow its participation in investment funds whose purposes coincide with those of CDP. In 2011, its operations were extended to acquiring equity holdings in companies of major national interest with stable financial positions and growth potential. In our view, this extension of eligible projects funded through the SA indicates the government's desire to make increased use of the extensive liquidity available to CDP, and keep the borrowing off its own balance sheet. Projects under the new remit can now be undertaken on the basis of long-term economic value as well as more usual financial eligibility criteria, which could increase the risk undertaken on the loan portfolio from extremely low levels. Through its infrastructure or "ordinary activity" (OA), CDP provides funding to private- or public-infrastructure concessionaires. OA loans are financed through borrowings without explicit sovereign guarantees and account for 5% of the loan book. In principle, if OA cash flow were to become insufficient, OA obligations might not be served on a timely basis by the government. In such a stress scenario, OA debtholders would have access to any and all of the assets held by CDP, other than those backing CDP's covered bonds. Furthermore, SA assets can be lent internally to OA to ensure payments on OA obligations. This internal transaction should not increase the default probability of SA obligations because these are guaranteed by the sovereign. In practice, it can be assumed that even the nonguaranteed part of CDP's obligations would be serviced pari passu with the SA obligations, and therefore with the sovereign's own obligations. As part of a government strategy to reduce the public-sector debt burden, CDP is expected to purchase SACE SpA, SIMEST SpA, and Fintecna Spa from the state by the end of 2012, in addition to the shares in SNAM SpA (A-/Negative/A-2) that it purchased from Eni SpA (A/Negative/A-1). We believe the integration of SACE and SIMEST into CDP's activities is consistent with CDP's mandate and will enhance its public policy role. We expect these transactions will negatively affect our view of CDP's future capital and earning positions and reduce its liquidity. The book value of the three state-owned companies totals about EUR9 billion, and we expect this would be funded by a draw-down of liquidity. The purchase of SNAM shares was financed by reduction of shareholding in Eni and, much less so, by a draw-down of liquidity. Outlook The negative outlook reflects that on the Republic of Italy. We expect OA loans to increase gradually, but to stay well within 10% of total loans and at less than 50% of CDP's liquidity (less than 4% as of June 2012) in the next few years. However, if these limits were breached, and CDP's non-guaranteed OA liabilities were to substantially increase, the ratings might come under pressure. Moreover, if the Italian government's strategy to reduce its own debt were to substantially weaken CDP's financial profile, and if the government were to redirect CDP's activities away from its current public policy role, we could reassess the likelihood of extraordinary support from the state. A reduction of sovereign support could lead us to lower the ratings on CDP. Related Criteria And Research -- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010 Ratings List Ratings Affirmed Cassa Depositi e Prestiti SpA Issuer Credit Rating BBB+/Negative/A-2 Senior Unsecured BBB+ Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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