OREANDA-NEWS. March 23, 2015. Fitch Ratings has assigned Autostrada Brescia Verona Vicenza Padova's (ABVP) EUR600m senior secured bond a final rating of 'BB+'. The Outlook is Stable.

The rating reflects the Italian toll road operator's fairly solid asset profile that is offset by a fairly weak debt structure. Traffic performances were better than Italian peers during the recent economic downturn, due to ABVP's network location being in one of the wealthiest and industrialised European regions. The rating is, however, weighed down by ABVP's debt structure comprising a single bond bullet maturity whose refinancing in 2020 relies on a new debt transaction largely based on terminal value (TV) payment at concession maturity.

In Fitch's view, the TV mechanism is robust as TV payment is contractually calculated on net book value, allowing ABVP to recover realised investments. It will be paid by a new concessionaire at concession maturity (2026) or, in case of delays, by the grantor (Italian Ministry of Infrastructure) two years later (2028). The concession handover is subject to TV payment, which should mitigate the risk of delays in TV payment. However, the TV scheme is unusual and substantially untested in Italy, which may affect banks' appetite to refinance such transaction structure. Despite a high breakeven interest rate at refinancing (14% in Fitch base case), this uncertainty results in a 'Weaker' assessment for Debt Structure Key Risk Factor and weighs on ABVP's rating.

Fitch does not regard the grantor's obligation to pay the TV as ranking at the same level of Italy's financial obligations but this, at current Italy's rating level (BBB+/Stable), does not represent a constraint for ABVP's rating.

Key Rating Drivers

Volume Risk - Midrange
ABVP operates a fairly small network (222km) that is strategically located at the centre of A4 corridor linking the west-east stretch of northern Italy. The concession has a predominantly (73%) light vehicles traffic structure with a mixed short/medium distance traffic profile supported by a wealthy and industrialised catchment area.

Traffic was resilient throughout the 2008-2011 financial crisis but experienced a shock in 2012 (6.4% vs. 7.2% nationwide) due to a collapse of domestic consumption in response to austerity measures. Traffic slightly contracted in 2013 (-0.98% vs -1.7% Italy) before rebounding in 2014 (1.95%). The inherent uncertainty of traffic related to the new Valdastico North stretch is, in our view, not credit-material given the small proportion of cash flow expected from this part of the network.

Under Fitch's rating case, traffic will moderately increase in 2015-2018 (0.5% on average) - mainly benefiting from the expected opening of Valdastico South - and be subdued thereafter. Downside risk mainly stems from a still evolving Italian economy and its potential impact on traffic dynamics.

Price Risk - Midrange
The price mechanism allows a return on the asset base and recovery of operating costs and depreciation of assets. Traffic forecast (and weighted average cost of capital on regulatory asset base) is agreed with the regulator every five years. In this timeframe, ABVP assumes traffic risk. Thereafter, traffic forecast is re-agreed with the grantor and this mechanism substantially insulates ABVP from volume risk. The tariff mechanism is protective but the assessment of this key rating factor is weighed down by the history of fairly low tariff increases (0.5% in 2005-2009). Tariff hikes in 2014 and 2015 were lower than expected (1.44% and 1.5%) but the shortfall should be recovered with the approval of an updated business plan expected shortly. The current low inflationary environment also weighs on short-term revenue performance.

Infrastructure Renewal - Midrange
ABVP faces an ambitious capex programme (EUR2.3bn included in 2014-2026 business plan), which will mechanically increase TV payment at concession maturity. The key investment is Valdastico North, a fairly complex greenfield project for which ABVP expects to raise a senior secured construction loan in 2017. ABVP has long-standing experience in delivering investments on its network (Valdastico South is 90% completed). The grantor's extensive oversight both in the tender and execution phase of the Valdastico North project mitigates the execution risk of the capex plan. The infrastructure renewal attribute is assessed as Midrange.

Debt Structure - Weaker
The rated bond is senior secured, bullet and fixed rate with most of proceeds being applied to prepay existing bank debt. Caps on distribution and lock-up covenants are protective features as are the broad set of ring-fencing provisions included in the concession agreement. The change of control clause does not offer material protection as it does not prevent the ultimate sponsor (Banca Intesa; BBB+/Stable) disposing of its (indirect) controlling stake in ABVP.

The capital structure will further change over the next few years as ABVP seeks to raise additional external funding to cover its large investment plan. Future creditors will rank pari-passu and share the security package with bondholders.

The rated bond is exposed to refinancing risk. ABVP, which had hitherto tapped the capital market, will remain cash flow negative (post interest payment) until 2024 (due to high capex requirements) and therefore new lenders refinancing the bond in 2020 have to rely on the TV payment at concession maturity. A delay in the receipt of the TV payment would mechanically delay the reimbursement of that loan. Under this scenario, ABVP would continue to run the concession, leaving lenders with a fair level of protection and incentive to roll over their debt until TV is paid. However, the uncertainty on banks' and the capital market's appetite for financing such transaction structures leaves bondholders exposed to refinancing risk and results in weaker overall assessment of ABVP's debt structure.

Financial Metrics
Fitch rating case - which incorporates conservative adjustments on traffic, inflation, opex and capex - results in a minimum project life cover ratio (PLCR) of 1.11x and a robust (2.6x on average) interest coverage ratio (ICR), which is a relevant metric in this transaction as a large part of debt raised over the concession period will be reimbursed through TV payment. The ratios would have been higher (min. PLCR 1.27x) if we had given full credit to regulatory protections on pass-through costs (which would be the case if cost overrun is not attributable to concessionaire). The rating case also includes upward adjustment on the cost (7.3%) of the bond refinancing facility as lenders may, in our view, seek higher interest rates to account for various uncertainties of the concession agreement, including the timeliness of TV payment.

Under our rating case, the cost of the future construction loan for the Valdastico North project is assumed at 5.6%. Following meetings with various stakeholders including the grantor we believe that an increase of funding costs that would make the Valdastico project unviable is likely to result in a rebalancing of ABVP concession's economics.

Sensitivity stresses on a variety of factors are robust, notably for the potentially higher cost of the bond refinancing facility (break-even interest rate 14% in base case, 12% in Fitch rating case) or lower-than-expected inflation and traffic growth. A delay of four years (to 2030) in TV payment would not materially alter the credit profile of the transaction as the impact of debt reduction from available free cash flow would be offset by a lower final TV payment.

Specific Concession Features
An absence of approval of the Valdastico North project by June 2015 will generate uncertainty since the concession will then require the parties involved (grantor and ABVP) to revise accordingly the business plan and the concession itself. This may lead to a shorter maturity or to an early concession termination. In the case of early termination, however, ABVP will continue to operate the concession until TV (EUR1bn in 2014) is paid. The early termination of the concession in itself would not trigger bond acceleration. Bond acceleration will only be triggered by a loss of operational control of the network or by concession amendments leading to a material reduction of current TV. Fitch notes the grantor's strong support for the Valdastico project so far, which is a positive sign in case of delays in project approval.

Compared with other rated Italian peers, the discipline of concession forfeiture (for concessionaire fault) is unusual as TV would not be paid in a lump sum but in instalments from the early termination date to the original concession maturity date.

Peer Group
ABVP is not directly comparable to any peers. Its transaction structure is fully based on TV payment at concession maturity rather than the usual path of debt-funded capex and subsequent debt repayment by free cash flow available before concession maturity.

ABVP is significantly smaller than national/regional toll road operators such as Atlantia (A-/Stable), Sias (BBB+/Stable), Abertis (BBB+/Stable) and Brisa (BBB/Stable). Compared with its Italian peers, ABVP performed slightly better during the economic downturn. Its tariff system allows some protection on traffic downside although the long-term history of tariff hikes shows only modest increases in 2004-2009 and in 2014-2015. ABVP is an experienced operator but its infrastructure renewal attribute is assessed as midrange (versus stronger for almost all its EMEA peers) because its investment plan mostly comprises greenfield capex. ABVP's debt structure is bullet (like most of its peers) but the high concentration of debt maturities, lack of experience and name recognition in the capital markets and refinancing risk related to the TV payment scheme lead to a weaker assessment of the debt structure.

RATING SENSITIVITES

The rating would be downgraded in the event of adverse changes to the concession framework and/or TV scheme. Sustained operational underperformance or material cost overruns on the Valdastico North project not being recognised in TV would be rating-negative. Conversely, a substantially higher-than-expected PLCR could be rating-positive.