TEXT-Fitch assigns Milano Serravalle Toll Road Network 'BBB' rating
Mar 01 - Fitch Ratings has assigned Italian toll roads operator Milano Serravalle-Milano Tangenziali (MSMT) a senior unsecured Long-term debt rating of 'BBB' with a Stable Outlook.
Key Rating Drivers
The 'BBB' rating results from the combination of a strong asset profile and a moderate financial structure. The rating is also constrained by contingent risks related to MSMT's involvement in major greenfield projects as well as some political/legal uncertainty around the material tariff hikes required by the EUR921m capex plan concentrated over 2014-2018.
Revenue - Volume Risk: compared to most assets in Fitch's toll roads portfolio, MSMT is a strong and mature network. The traffic has been highly resilient through the 2008-2010 crisis (max -1% decline), in particular because of the absence of real competing alternatives. However, 2012 saw a sharp drop (-6%), and 2013 is also expected to see a decline. Although Fitch expects the traffic to recover in the medium-term, the risk of a longer recession with unknown effects on traffic weighs on the resilience. The attribute is thus Midrange.
Revenue - Price Risk: The concession framework is robust (similar to the RAB-based system of Atlantia ), with tariff hikes linked to the implementation of capital expenditure, and partly adjusted for potential traffic downturns. However, some uncertainty remains with regards to the possible political interference due to the sharp toll increases (compound annual growth rate 8% in constant prices between 2012 and 2021) that the capex plan, if realised, would mechanically trigger. This gives a Midrange attribute.
Infrastructure Development/Renewal: The execution of the EUR921m capex plan between 2013 and 2021 remains a big challenge and driver to increase traffic volume organically (through de-bottlenecking) and achieve remuneration on investments that will significantly increase tariffs. Fitch believes MSMT is likely to face delay risk because of permits and authorisations, but debt will be incurred only if and when authorisations are received, hence a Stronger attribute is justified.
Debt structure: MSMT's debt is amortising and benefits from solid back-up liquidity. However, only 30% to 40% is hedged to fixed rates. The covenant package is better than in most peers but is not sufficient to provide robust protection. The balance makes a Midrange attribute.
Debt service and Counterparty Risk: Leverage stood at a low 2.75x at YE12. MSMT currently has a low indebtedness, but will face an ambitious capex programme (EUR921m, still subject to an agreement with the grantor) as required by the updated business plan, once approved. This additional leverage risk is well mitigated by the tariff mechanism (tariff would increase to adjust for some degree of cost overrun on the concession capex) covering much of the capex risk.
However, MSMT is also committed to inject EUR464m equity in the two greenfield projects it is carrying. MSMT is indeed a majority sponsor in Pedemontana and a minority sponsor in TEM, two regional toll roads aimed at complementing and reducing network congestion in the Lombardy region. This investment will be partly funded by asset disposal (MSMT has signed the disposal of EUR44m of holdings in the Brescia-Padova A4 motorway) and a EUR300m capital injection from its own shareholders. The additional net debt would thus amount to EUR120m, leading to a 4.2x leverage in 2015, according to the management case.
The traffic decline in 2012 highlighted vulnerability to austerity impacts. Leverage under Fitch's rating case, which takes a conservative view on traffic development, is likely to increase and hover around the 5x mark (Fitch calculations). Given the relatively short remaining concession life of 15 years, the leverage metric underplays the true debt service implications. Therefore Fitch also considers metrics that assess the ability of the cashflows to amortise debt: The synthetic annual debt service coverage ratio (ADSCR; annuity profile leaving a prudent three-year tail) would average 1.4x between 2013 and 2018. This suggests a Midrange attribute.
Other Key Factors: Greenfield risk exposure in two projects. MSMT is increasingly involved in the development of Pedemontana and TEM. This results in some construction risk as well as political/institutional risk, since the two companies have not yet finalised their funding structure, and may call on MSMT, which could have to top up required equity injections. This risk is limited by MSMT's concession contract, which includes a covenant on the additional debt that MSMT can borrow. However, Fitch considers that this is a material contingent liability.
Peer Group: The main peers for MSMT are Atlantia (A-'/Stable), APRR ('BBB+'/Stable) and Brisa ('BBB'/Negative). MSMT has proved more resilient than its direct peers (except APRR). Even Atlantia experienced larger decline in 2012 than MSMT, while Brisa suffers from adverse economic development in Portugal. US peers, such as South Jersey ('BBB+'/Stable) or Texas turnpike ('BBB+'/Stable) have higher ratings with higher leverage (7.8x to +20x) although they feature better security packages (notably "rate covenants").
Within rating criteria guidance: Fitch's guidance suggests a DSCR of 1.2x to 1.5x reflects an 'A' category credit, in the case of an asset with established operating history (i.e. demonstrated resilience). This guidance applies generally to credits benefitting from a strong price flexibility (so-called "rate covenant" in the US). Such a price flexibility is rare in Europe, where the guidance would therefore be more demanding (a 1.2x to 1.5x would be more commensurate with a 'BBB' category). With attributes either in Stronger or Midrange categories on the key rating factors and synthetic DSCR of 1.4x in rating case, the 'BBB' rating is in line with the adjusted guidance. This is to accommodate for more uncertainty, as is consistent with criteria.
Fitch has modelled various sensitivities on traffic, capital expenditure and cost of debt.
The rating could be upgraded if the net debt/EBITDA ratio (as calculated for covenants) consistently stands below 5x with a quick de-leveraging profile to accommodate for the concession maturity in 2028, a synthetic DSCR (which reflects the quick debt amortisation profile) in excess of 1.5x, and risks related to Pedemontana/TEM ease.
The rating could be downgraded if the net debt/EBITDA stands above 6.0x (level as at 31 December 2012 2.75x, projected level as at 31/12/2015: 5.2x) or does not allow the quick deleveraging profile to accommodate the concession maturity in 2028, or the synthetic DSCR is consistently below 1.3x.
Other events or risks likely to affect the ratings are as follows:
Acquisition debt: Milano Serravalle is currently up for sale and there is no visibility as how the potential new shareholders will finance the acquisition. Any acquisition debt added to MSMT's balance sheet or sitting above MSMT (e.g. through a leverage-finance type structure) and relying prominently on the dividends flow from MSMT would likely have a negative impact on MSMT's ratings.
Lack of Recapitalisation: Fitch's rating case is built on the assumption that MSMT would not inject EUR464m equity in Pedemontana and Tem without receiving a EUR300m capital injection from its own shareholders. This assumption is backed by Fitch's understanding of the protection given by MSMT's concession contract (also evidenced by MSMT's official report to its shareholders), which would prohibit such a scenario. However, should this unlikely scenario happen, either through a breach of the concession covenant, or through its amendment/waiver, the resulting increase of leverage would trigger a negative rating action, possibly by several notches.
Greenfield troubles: Negative developments on the two major greenfield projects, implying potential additional equity needs requested from MSMT, may prompt negative rating action for the company.
Exposure to Italian recession: The short-term part of the rating case include a 2.5% and 0.5 decline in traffic for 2013 and 2014 respectively. A sharper or more durable degradation of the Italian economy could derail MSMT's solid record of resilience. Evidence of deeper recessionary prospects over a prolonged horizon (two years) could prompt a negative rating action.
Austerity knock-on effects: Austerity-related decisions made by the Italian Government, such as changes in taxation or freezes in toll-rates increases, could be adverse to infrastructure concessionaires and weigh on the rating. In the past however, similar measures have been announced and then abandoned. Some caution is thus required before a rating action appears warranted.
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