OREANDA-NEWS. March 30, 2015. Fitch Ratings is maintaining Italian toll roads operator Milano Serravalle-Milano Tangenziali's (MSMT) 'BB+' senior unsecured debt rating on Rating Watch Negative (RWN).

The RWN reflect uncertainty around the company's ability to roll over its EUR72m bridge loan maturing at end-March 2015. Lenders are, however, in the process of approving the extension of the loan's maturity to September 2015.

KEY RATING DRIVERS

MSMT has recently proposed to the grantor to downsize its direct investment plan (to EUR380m from EUR700m) in exchange for lower tariff hikes. The downsizing of its business plan, if approved, would materially improve MSMT's capital structure. Under Fitch revised rating case - which incorporates the proposed lower capex and tariff - MSMT's leverage will remain safely below the 6x mark over the next five years. Concession debt will be fully repaid three years before concession maturity (2028).

The recent change in ownership - with the financially- and politically-strong Region of Lombardy becoming the indirect controlling shareholder - is also a positive credit development for MSMT and its 79%-owned subsidiary Autostrada Pedemontana Lombarda (APL) which is running a large (EUR5bn), financially strained greenfield project in the region.

The APL project is under severe financial stress. Traffic forecast has been materially revised lower and banks involved in the project (as shareholders and lenders) have neither provided additional equity nor new financing. The EUR200m bridge loans continue to be regularly overdue, with lenders granting only short-term maturity extensions. To cover this financial shortfall and to keep the project running, MSMT has materially increased its exposure to APL since 2012. Despite MSMT not being willing to provide additional material funds to APL, further financial support cannot be ruled out if APL continues to be managed with a short-term financial view.

APL has still significant financial needs. The first phase of the project (35%) is to be delivered by mid-2015 but additional funding requirement of around EUR3bn is needed to complete the remaining 65% of the project. In this respect, we expect that the recent involvement of the Region of Lombardy in the discussion on APL funding should contribute to a clearer, long- term view on APL's future capital structure.

Volume Risk- Midrange
From an operational standpoint, MSMT has performed substantially in line with Fitch's expectations. After a sharp fall in 2012 (-6.3%), traffic moderately contracted in 2013 (2.1%). This largely reflected the effect of Italy's austerity measures feeding into the real economy and consumer activity. However, MSMT's FY14 traffic figures show signs of stabilisation (+0.7% yoy). Under Fitch's updated rating case, traffic moderately will grow in 2015 (+1.5%), sustained by Milan EXPO and remain subdued thereafter. The downside risk to this scenario mainly relates to the still evolving Italian economy and its impact on traffic dynamics.

Price Risk- Midrange
Tariff increase for 2015 (+1.5%) was lower than expected but the concessionaire should be compensated with the approval of the updated business plan. Under MSMT's proposed business plan, tariff hikes will be capped at 1.5% until 2017 but lower concession flows will be offset by capex reduction. Lower tariff increases would limit the risk of price elasticity on MSMT's network. The Price Risk attribute is assessed as midrange.

Infrastructure Renewal - Midrange
MSMT's current ambitious capex programme (of around EUR700m) would be substantially halved if the grantor approves the downsized business plan with a view to reducing tariff hikes. MSMT has a long-standing experience in delivering investment on its network but its growing involvement in APL and uncertainty on the size of its direct investment programme constrain the Infrastructure Renewal attribute to Midrange

Debt Structure - Weaker
Despite the possible capex downsizing, MSMT will remain dependant on external funding to cover its direct and indirect investment needs and repay its maturing debt. The existing bank debt is unsecured, carries mostly floating rates (78%) but benefit from a financial covenant package comprising leverage and capital structure ratios.

MSMT's plan to use a single large bullet debt would weaken its current debt structure (predominantly amortising) and expose the issuer to refinancing risk, given that the company has never tapped capital markets. MSMT's liquidity is stretched (EUR34m at FYE14). Under Fitch rating case, such liquidity would only be sufficient to cover June 2015 maturities provided that, the EUR72m bridge loan due at end March is rolled over. Debt Structure is assessed as Weaker.

Although significantly smaller in size, the main peers for MSMT are Atlantia (A-/Stable), Sias (BBB+/Stable) Abertis (BBB+/Stable) and Brisa (BBB/Stable). Although MSMT's traffic has performed in line with Italian peers and better than its international peers (Abertis and Brisa), its credit profile is largely weighed down by contingent risk stemming from APL and a weaker debt structure.

RATING SENSITIVITIES
Despite positive developments at MSMT over the past few months, a number of key uncertainties remain outstanding. The resolution of the RWN will focus on MSMT's liquidity position, including the expected rollover of the EUR72m bridge loan, progress in the grantor's approval of the downsized business plan and additional financial support MSMT could provide to APL.