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May 16 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has revised Ferrovie dello Stato Italiane's (FS) Outlook to Stable from Negative, while affirming the Long-term Issuer Default Rating at 'BBB+'. Its EUR4.5bn euro medium-term note programme (EMTN) and bond issues (XS1004118904 and XS0954248729) were affirmed at 'BBB+'.
FS's Outlook change follows a similar action on Italy's sovereign ratings (see Fitch Revises Italy's Outlook to Stable, Affirms at 'BBB+' dated 25 April 2014 at www.fitchratings.com) as per the agency's 'Rating of Public Sector Entities Outside the United States' criteria. The ratings reflect FS's full ownership by and high integration with the Italian government as well as its key role in the national infrastructure development.
The ratings also consider FS's strong standalone profile, underpinned by a 80% market share in national passenger transportation rail and by its growing, albeit modest, exposure to international activities and cyclical freight. FS continues to perform broadly in line with Fitch's expectations; operating revenues are forecast by the agency to grow about 1% per annum over the medium term to EUR8.5bn by 2015 and the EBITDA margin hovering around 22%.
According to preliminary data for 2013 FS recorded a net profit of EUR460m at the group level, almost 3x as much as Fitch's expectations. However, public spending cuts by the national government for 2014-2016 may compress profitability towards Fitch's baseline scenario of about EUR200m over the medium term. FS's consolidated debt in 2013, on a Fitch-adjusted basis including about EUR200m derivatives, stood at EUR11.8bn, in line with the agency's expectations. Net debt/EBITDA was 5x against Fitch's projections of about 6x for the 2013-2015 period.
FS's 2014-2017 business plan envisages EUR24bn of capital spending to upgrade the network and rolling stock, with total debt stabilising at 2013 levels. Under Fitch's base case scenario weaker performance, higher debt-funded investments and an eventual adverse ruling for a possible state-aid controversy would push gross debt towards EUR14bn. However, Fitch's calculated leverage for this period would remain at 5x when net of projected liquidity reserves and state-subsidised borrowing, thereby keeping the ratio in line with the average for 'BBB' rating category on a standalone basis.
The group retains strong linkages with the national government, which guarantees or subsidises roughly 50% of FS's debt, funds about 50% of FS's investments and 50% of its operations. Fitch considers it positive that FS's treasury and cash pooling system are centralised at the FS SpA level, the group's holding company and issuer of the bonds under the upcoming EMTN programme. Government transfers are paid into a deposit account held with Bank of Italy and FS has to submit a monthly report. The monthly report contains forecasts and is instrumental to maintaining adequate liquidity, which is usually kept above EUR1bn.
FS's ratings and Outlook will continue to mirror those of Italy in light of their credit linkage. Weaker sovereign links or a dilution of government financial support, leading to a higher-than-expected growth of the group's debt or a material shrinkage of liquidity cushion would be negative for the ratings. The unbundling of the group via separation of its infrastructure network Rete Ferroviaria Italiana without compensation for the loss of revenue stability would also be rating-negative.