OREANDA-NEWS. January 26, 2016. Fitch Ratings has affirmed Acquedotto Pugliese S.p.A.'s (AQP) Long-term Issuer Default Rating (IDR) at 'BBB' and senior unsecured bullet bond of GBP165m (ISIN XS0192465663) at 'BBB'. The Outlook is Stable.

The affirmation reflects AQP's resilient profitability, moderate debt and our expectation of continued financial support from the sponsor and sole shareholder, the Region of Puglia, through the remaining concession period, i.e to end-2018.

The ratings are derived from AQP's standalone profile in Fitch's "bottom-up" approach under its "Rating of Public Entities outside the US" as we consider AQP a non-credit-linked entity (NCLE).

KEY RATING DRIVERS
Operating performance was resilient in 2014 and AQP's EBTIDA margin was in line with Fitch's expectations at 30%, benefiting from increases in tariffs by the independent authority AEEGSI of 4%-6% in 2013-15. Fitch sees AQP's operating margin growth consolidating in the medium term, under the new tariff mechanism set forth by AEEGSI for 2016-2019, which provides for progressive recognition of AQP's EUR750m planned investment through to end- 2018. The improved regulatory environment and execution of the investment programme should support AQP's revenue resilience till concession expiry.

AQP's ratings benefit from a single-notch uplift from its standalone credit profile, reflecting strong ties with the Region of Puglia. The strong relationship is based on AQP's role as the region's sole water provider with responsibility to manage the infrastructure and its development. The region in 2014/2015 disbursed a EUR200m loan to AQP to overcome refinancing risk, a constraint that had been heighted by the approaching concession expiry.

Fitch expects the repayment of the EUR200m shareholder loan to be subordinated to senior unsecured debt, if need be, and takes a positive view of the conservative dividend policy as a sign of the region's commitment to maintaining AQP's financial viability

AQP's standalone investment-grade rating is underpinned by moderate leverage as measured by debt-to-EBITDA at 3.0x and recurring and predictable funds from operations (stable above EUR100m a year). The company's pipeline network is experiencing leaks that waste around one third of transported water, but upgrading work depends on financial support from the parent as banks currently refrain from extending financing beyond the concession expiry. Fitch expects AQP's annual revenue to be around EUR500m in 2015-2017 but slow economic recovery in the Region of Puglia poses challenges to AQP's performance and cash flow.

We expect AQP's gross debt to rise to EUR600m over the medium term while loans and bonds are either guaranteed on a non-first demand basis or grandfathered by the region. Fitch expects AQP's interest cover by operating cash flow to remain compatible with its investment grade profile and at 4x-8x over the medium term.

RATING SENSITIVITIES
Stronger cash flow generation leading to adjusted debt-to-EBITDA consistently below 2.0x could lead to an upgrade of the stand-alone rating.

The IDR and/or the standalone rating could be downgraded in case of an unexpected deterioration of AQP's operating performance and/or change in the dividend policy or financial support reflecting weaker ties with the Region of Puglia.