OREANDA-NEWS. Fitch Ratings has revised the Outlook on Autostrada Brescia Verona Vicenza Padova's (ABVP) EUR600m senior secured bond to Negative from Stable, while affirming its rating at 'BB+'.

The Negative Outlook reflects regulatory uncertainty following delays to the approval of ABVP's regulated business plan, which is holding up tariff increase. At the same time there remains no visibility on the final weighted average cost of capital (WACC) for the current regulatory period. This is caused by a standstill in the approval of Valdastico Nord, a greenfield project covering the north-east of Italy in ABVP's network.

The Ministry of Infrastructure (the grantor - MIT) and the local authorities are still discussing on the final location and layout of Valdastico Nord network. In 2H15 a formal committee between central and relevant local authorities was established to find an agreement on project development but the timing of the approval remains unclear at this stage. Such overall regulatory uncertainty reduces the visibility of ABVP's future cash flow generation, leading to today's Outlook revision.

The 'BB+' rating considers ABVP's solid asset profile as well as its fairly weak debt structure that comprises one single bullet maturity with high exposure to refinancing risk.

ABVP operates one of the busiest Italian toll road networks under an unusual concession structure where capex and related debt are recovered through a terminal value (TV) payment. This TV is paid by a new concessionaire at concession maturity (2026) or, in case of delays, two years later by MIT in 2028. If the TV is not paid, ABVP will continue to operate the concession.

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. However, the TV scheme is unusual and substantially untested in Italy, which may affect banks' appetite to refinance such transaction structures. Despite a high breakeven interest rate at refinancing (15% in Fitch base case), this uncertainty results in a 'Weaker' assessment for Debt Structure Key Risk Factor and weighs on ABVP's rating.

KEY RATING DRIVERS
Volume Risk - Midrange
ABVP operates a fairly small network (235km) 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) but recovered in 2014 (1.95%) and 9M15 (+4.3%), partially driven by the opening of new stretches.

The inherent uncertainty of traffic related to the new Valdastico Nord 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 increase 0.7% during the concession period.

Price Risk - Midrange
The price mechanism allows a return on the asset base and recovery of operating costs and depreciation of assets. The mechanism is protective on paper but the assessment of this key rating factor is weighed down by the history of fairly low tariff increases (0.5% in 2005-2009) as well as recent tariff suspension, pending the approval of the regulated business plan. The grantor is, however, committed to allowing ABVP to recover the tariff shortfall when the updated business plan is approved. Under the rating case we assumed flat tariffs until 2017.

Infrastructure Development & Renewal: Midrange
ABVP has extensive experience in delivering investments on its network. In August 2015 the company successfully delivered the last stretch of Valdastico Sud. However, the company now faces a more ambitious capex programme (EUR2.3bn included in the 2016-2026 business plan), which will mechanically increase TV payment at concession maturity. The key investment is Valdastico Nord, whose final design and location is still under discussion. The grantor's extensive oversight both in the tender and execution phase of Valdastico Nord 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. 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 (Intesa Sanpaolo; BBB+/Stable) disposing of its indirect controlling stake in ABVP. The current rating of the bond does not factor any form of shareholders' support.

The capital structure will further change in the future 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. Due to high capex requirements, ABVP will remain cash flow-negative post interest payment until 2023. New lenders refinancing the bond in 2020 will therefore 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.

Debt Service
Fitch rating case - which incorporates conservative adjustments on traffic, inflation, opex and capex - results in a minimum project life cover ratio (PLCR) of 1.16x, 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 if we had given full credit to regulatory protections on pass-through costs.

Average interest coverage ratio (ICR) is 2.9x, while projected three-year leverage is 6.2x. The rating case also includes upward adjustment to the cost of the bond refinancing facility (7.3%) 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.

Sensitivity stresses on a variety of factors are robust, notably for the potentially higher cost of the bond refinancing facility (break-even interest rate 15.2% in base case, 13.0% 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
A lack of agreement on Valdastico Nord will create uncertainties on ABVP's future operations since concession terms require 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 (EUR0.9bn in 2015) 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.

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. 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. Like most of its peers, ABVP's debt structure is bullet 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 SENSITIVITIES
Persistent regulatory uncertainty on tariff increases or on the approval of the regulated business plan and lower-than-expected WACC would be credit-negative as would any adverse changes to the concession framework or TV scheme. From a credit metric perspective, the rating could be downgraded should the minimum PLCR weaken to 1.1x under the rating case.

Failure to pre-fund its bond well in advance would be credit negative as would an increase in current refinancing risk.

Approval of the regulated business plan and related WACC as expected and the full recovery of tariff shortfall would lead to the Outlook being revised to Stable.

Fitch views the grantor's obligation to pay the TV as subordinated to Italy's financial obligations but given Italy's current rating (BBB+/Stable), this does not represent a constraint on ABVP's rating. However, ABVP's rating would be negatively affected if Italy's rating is downgraded by more than one notch.