August 28, 2014 / 1:16 PM / 3 years ago

Fitch Affirms Acquedotto Pugliese S.p.A. at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) MILAN/BARCELONA/LONDON, August 28 (Fitch) Fitch Ratings has affirmed public sector utility Acquedotto Pugliese S.p.A.'s (AQP) Long-term Issuer Default Rating at 'BBB-' with Stable Outlook and senior unsecured rating on its GBP165m (ISIN XS0192465663) bullet bond at senior unsecured 'BBB-'. KEY RATING DRIVERS The ratings reflect AQP's resilient profitability and moderate debt amid an expectation of growing financial support from the Region of Puglia as the company approaches its concession expiry in 2018, making borrowing in capital markets difficult. Fitch uses a bottom-up approach within its public sector entities criteria to rate AQP, and notches up AQP's IDR from its standalone credit profile by one level to reflect its strong ties with the region. In 2013 AQP performed broadly in line with Fitch's medium-term expectations, reporting an adjusted net profit close to 5% of income and an EBITDA margin of 30%. Fitch expects AQP's revenue to edge closer to EUR0.5bn in 2014-2015, and trade receivables to drift to 55% of revenue, up from an average of 50% in 2011-2013, reflecting economic slowdown and a tariff increase of 6%. The latter includes EUR12m of recoveries of regulatory-related costs. Although most of the assets are owned by the municipality AQP is investing to upgrade its pipelines as roughly a third of water is lost through leaks. Fitch expects AQP to self-fund around EUR100m of investment per annum and the Region of Puglia to extend loans of up to EUR200m to partly fund its EUR500m capital spending programme in 2014-2016, as the concession expiry is holding back long-term market borrowing. AQP's liquidity, which rose to EUR288m in 2013 on advances from the region for future capital spending, will be partly absorbed by the redemption of EUR95m loans coming due between December 2014 and January 2015. Fitch expects AQP's gross debt to be around EUR600m over the medium term, or 2x EBITDA net of liquidity, up from 1.5x in 2013. Its interest cover ratio by the operating cash flow (FFO) should remain at 5x-6x. AQP has outstanding debt of EUR500m but this figure declines to EUR340m, after adjusting for sinking fund provisions for the bullet bond repayment due in 2018. Loans and bonds are either guaranteed on a non-first demand basis or grandfathered by the region. Fitch expects the repayment of the new EUR200m shareholder loans in 2020 to be subordinated, if need be. AQP plays a key role in the region's water infrastructure and development strategy as the biggest provider of water, sewage and wastewater services. AQP provides rebates to low-earners in exchange for substantial capital subsidies from the region and the EU to fund investments. RATING SENSITIVITIES More formalised support from the Region of Puglia, such as a first-demand guarantee on all loans/bonds, could trigger an upgrade of AQP's ratings, provided the region's credit quality is stronger than AQP. The drawdown of the new EUR200m shareholder loans, securing funding for the medium-term investment plan and strengthening liquidity, could also lead to an upgrade of the IDR and/or the 'BB+' standalone rating. The IDR could be downgraded if AQP's profitability weakens, if debt grows above expectations to offset weaker operating cash flow, or if the EUR200m shareholder loans fail to materialise without a corresponding rise in other forms of regional financial support. Contact: Primary Analyst Raffaele Carnevale Senior Director +39 02 87 90 87 203 Fitch Italia S.p.A. 6, Via Morigi 20123 Milan Secondary Analyst Claudio Cappelli Analyst +39 02 87 90 87 260 Committee Chairperson Guilhem Costes Senior Director +34 93 323 8410 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable criteria 'Revenue-Supported Rating Criteria' dated 3 June 2013, 'Rating of Public Sector Entities - Outside the United States' dated 4 March 2014, 'U.S. Water and Sewer Revenue Bond Rating Criteria' dated 31 July 2013 and 'Public-Owned Water and Sewer Utilities' dated 15 October 2013, are available at Applicable Criteria and Related Research: Revenue-Supported Rating Criteria here Rating of Public-Sector Entities - Outside the United States here U.S. Water and Sewer Revenue Bond Rating Criteria here Public-Owned Water and Sewer Utilities here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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