(The following statement was released by the rating agency)
Oct 03 - Fitch Ratings has maintained Acquedotto Pugliese SpA’s (AQP) ‘BBB-’ Long-term Issuer Default Rating (IDR) and senior unsecured rating on Rating Watch Negative (RWN).
The maintained RWN is driven by persisting regulatory uncertainties surrounding the future tariff setting methodology and AQP’s weakening liquidity position. While at this level, the ratings are unconstrained by the Negative Outlook on the Italian sovereign.
Regulatory uncertainties persist as the consultation phase that should eventually result in a reform of the water tariff setting methodology and more in general of the water sector framework is still underway. On balance, the revised tariff mechanism proposal is positive, but it remains to be seen whether the proposed method will be included in the final framework.
According to the documents published so far, the consultation should lead to the determination of a tariff adjustment factor applicable for a transition period (2012 and 2013), while a final determination of the tariff formula and a more comprehensive reform of the sector will be effective only from 2014. The proposed tariff adjustment factor takes into account the abolition of the remuneration of investments, as per the outcome of the 2011 referendum, and is likely to result in a claw back of the relevant portion of the tariff charged during July-December 2011. However, as a positive offsetting factor the new tariff formula, in line with the dictate of the European directives on water and environmental subjects, will remunerate financial costs among other things. This item, which is now included in the formula proposed by the regulator for the transition phase adjustment, will help mitigate, if not fully off-set the effect of the abolished 7% fixed remuneration rate on investments.
Among other positive factors of the proposed method is the inclusion of a local tax charge (IRAP) within the total fiscal charges remunerated by the tariff. Furthermore, the consultation has proposed the introduction of advance deposits on consumption along the lines of the standards that apply to the electricity and gas bills. The introduction of this provision in the water sector is extremely helpful for companies as it represents a good source of cash up-front and will help mitigate losses from bad debts. The water sector is much more prone to non-payments or late payment than its gas and electricity peers as it is physically more difficult to activate the interruption of the service. The introduction of the deposit will help companies manage bad debtors and will significantly improve working capital dynamics.
In addition to ongoing, albeit slowly abating, regulatory uncertainty, the second driver underpinning the RWN is liquidity. In June 2013, the EUR225m syndicated facility expires. This is AQP’s main back-up liquidity, and it had used EUR165m as of June 2012. So far banks have shown a conservative attitude towards the sector. The combination of regulatory uncertainties and the potential pressure on the domestic banking sector stemming from a deterioration of the eurozone crisis, will eventually make bank refinancing more difficult and costly. Hence Fitch will monitor the prioritisation of AQP’s refinancing strategy to avoid any liquidity risk.
AQP’s Long-Term IDR of ‘BBB-’ benefits from a one-notch uplift from the standalone assessment of ‘BB+’ for support from its shareholder (the Puglia Region), whose credit profile is not aligned with the sovereign rating. The essential service nature of the water distribution activity and the relative stability of water volume sold make AQP’s business risk profile in the context of a sovereign stress scenario not very different from an electricity or gas utility and Fitch acknowledges the possibility for a corporate like AQP to be rated above the sovereign if this is justified by the standalone creditworthiness. However, a downgrade of Italy’s IDR to the ‘BBB’ category could put pressure on the Region of Puglia’s credit profile and therefore lead Fitch to no longer apply the one-notch uplift for shareholder support to AQP’s rating.
AQP’s rating is on RWN. As a result, Fitch’s sensitivities do not currently anticipate developments with a material likelihood of leading to a rating upgrade. Future developments that may nonetheless, individually or collectively, lead to a positive rating action include:
- Positive tariff adjustment resulting from the application of the upcoming new tariff setting mechanism for 2012 and 2013
- Improvement of liquidity position: rollover of existing RCF lines or new committed bank lines
- Strengthening of shareholder’s support by way of extension of direct and unconditional guarantee on debt obligation of AQP
Future developments that may, individually or collectively, lead to a negative rating action include:
- Pressure on liquidity: further delays to rollover bank facility or raise new debt
- Negative tariff adjustment as a result of the tariff review during the transition regulatory period
- A downgrade of Italy’s IDR to the ‘BBB’ category could put pressure on the Region of Puglia credit profile and therefore lead Fitch to no longer apply the one-notch uplift for shareholder support to AQP’s rating