OREANDA-NEWS. Fitch Ratings has affirmed Trentino Trasporti S. p.A.'s (TT) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'A-' with Stable Outlook. Fitch has also affirmed TT's Short-Term Foreign Currency IDR at 'F2'.

The rating primarily reflects the strategic importance TT holds for its 73% shareholder, the Autonomous Province of Trento (PAT - see 'Fitch Affirms Trento's IDR at 'A', Stable Outlook, dated 10 June 2016 on www. fitchratings. com) and the extensive control and financial support from its sponsor. TT is rated using a top-down approach under Fitch's criteria for rating public-sector entities outside the U. S. The one-notch differential between TT and PAT reflects residual financial liabilities not fully covered by guarantee from TT's sponsor.

KEY RATING DRIVERS

Strong Strategic Importance: TT is a pivotal vehicle for implementing PAT's transportation services and is one of the public sector entities (PSEs) that are tightly managed by PAT and receive funding from the province for their investments. As mandated by provincial law, TT leases out rolling stock, bus fleets and cable cars for public service to Trentino Trasporti Esercizio (TTE), a fully owned company of the province, based on a service agreement that expires in 2017.

Under the public service scheme adopted by PAT, TT's revenues stems from rental income complemented by PAT's subsidies, which accounted for 80% of TT's total revenues in 2015, sufficient to guarantee the company's balanced accounts and service debt.

PAT has announced a possible restructuring of its public service entities (PSEs), which may lead to the merger of entities operating in the same sector. As a result, PAT's plan is to merge TT and TTE and the local small airport to achieve synergies and cost savings. The plan is still being evaluated and may be implemented only after 2017. Given the debt-free profile of TTE the financial profile of the combined entity may not see a material impact provided that the financial support scheme remains unchanged.

Tight Control and Integration: TT acts under tight supervision from PAT. Specular board members of TT and TTE are mostly appointed by the province to ensure ease of strategy implementation for the public service sector. Under the financial scheme for PAT's PSEs, PSEs such as TT fund their investments with their own debt that are subsidised or guaranteed by the province. The track record of funding from PAT to support TT's capex and guarantees to back TT's loans underpin Fitch's view that extraordinary support from the province is highly likely in case of need, hence limiting the rating differential to one notch.

Fitch views TT's legal link with the sponsor as mid-range and therefore moderately supportive of the company's credit quality. TT's by-law, whose modification would require the province's approval, requires that the province's stake - alone or together with other public entities - cannot fall below 51% of TT's equity.

TT plans to invest nearly EUR120m over 2016-2018, mainly to upgrade its railway network, trains and bus depot system and to purchase trains and buses. Funding will come from a combination of sponsor-provided capital transfers, drawings under existing facilities with the European Investment Bank (EIB) and market debt backed by full and unconditional guarantee from the province.

As a result, Fitch expects TT's debt to exceed EUR115m by 2018, putting pressure on the company's liquidity over the medium term. However, these funding requirements will not add material pressure to PAT as total risk from its PSEs' network represents less than 10% of the province's revenues.

RATING SENSITIVITIES

As the IDR is credit-linked to the province's rating, it is sensitive to changes to the province's ratings. A dilution of provincial support as evidenced by material unsubsidised borrowing or income losses not compensated by support from PAT may lead to a downgrade, thereby widening the rating differential between TT and PAT to two notches.