S&P: Italy-Based Single Toll Road Operator Autostrada Brescia Padova 'BBB-' Rating Affirmed; Outlook Stable

S&P Global Ratings today affirmed its 'BBB-' long-term issuer credit rating on Italy-based single toll road operator Autostrada Brescia Verona Vicenza Padova (ABP). At the same time, we affirmed our 'BBB-' issue rating on the €400 million secured fixed-rate notes due 2020. The outlook remains stable.

The affirmation reflects our view that the stronger-than-expected ratios for 2017 were temporary and partly caused by the delay in the approval of the Valdastico Nord project (€1.9 billion construction cost). The project had already been delayed for years by the grantor (the Italian Ministry of Infrastructure and Transport; MIT) due to a lack of an agreement between ABP, MIT, Province of Veneto, and the Autonomous Province of Trento.

The postponement of capital expenditure (capex) encouraged the company to buy back €200 million of notes in 2017, of the €600 million issued in 2015, after noteholders' acceptance of the offer to sell. The delayed spending, combined with strong traffic growth of 3.2% and a tariff increase of 1.62% in 2017, boosted ABP's metrics well above our expectations--funds from operations (FFO) to debt reached about 41% in 2017. We do not consider such strong metrics sustainable over the long term, as we expect the company to increase leverage once more to finance the construction of Valdastico Nord before the concession matures in 2026.

It is not yet clear when the 2013-2017 and 2018-2022 economic and financial plans (PEFs) will be approved. These PEFs are strongly linked to the approval of Valdastico Nord. As a result, there is a lack of visibility on future tariffs, the timing of the investment, and the ultimate capex amount.

However, we expect FFO to debt to decline below 20%, assuming total construction costs of about €1.9 billion and a 2% annual tariff growth. The noteholders are exposed to refinancing risk in 2020 and to the risk of concession expiry in 2026. In our view, this is mitigated by the termination value payment specified in ABP's concession contract, which corresponds to the net book value of the motorway assets (currently estimated at €1.8 billion). That said, we think that ABP will likely continue to operate the toll road concession if the construction of Valdastico Nord is still ongoing at the time of re-tender in 2026.

The rating reflects our expectation that the investment plan will be approved and the construction of Valdastico Nord (39 km, connecting the A31 to Brennero toll road near Trento) will start before the end of the concession. However, if this does not materialize, our view of the business would weaken due to the approaching concession maturity, the absence of a termination value payment to mitigate the refinancing risk, and the limited scope for tariff increase. That said, we expect that ABP will maintain very strong ratios under this scenario due to limited capex.

Compared with other European toll road operators, ABP operates a relatively small network, represented by a 146 km stretch of the A4 toll road between Brescia and Padova and 89 km of the A31 toll road in Veneto region. This network was extended by 33 km in 2015, when the construction of Valdastico Sud was completed. This cost €1.2 billion and was partially remunerated through tariff increase approved by the grantor (6.56% in 2010, 7.08% in 2011, 7.45% in 2012).

Although our view of ABP is constrained by its relatively small size and lack of geographical or asset diversification, our view of ABP's business risk profile signifies that it manages one of the busiest toll roads in Europe. The average daily traffic (ADT) on the A4 stretch in 2017 was of 94,746 vehicles. The company is also reporting continuous traffic growth (3.2% in 2017) and in 2017 achieved its highest ADT level since 2007.

We consider the regulatory framework supportive overall as we expect the grantor to support Valdastico Nord's investment with commensurate tariff growth, in addition to the termination value recognized under the terms of the concession.

ABP is fully-owned by A4 Holding, which is 90% owned by Spain-based infrastructure operator, Abertis Infraestructuras S. A. Nevertheless, our rating on ABP is not influenced by the parent's credit quality.

Our base case assumes: Annual tariff growth of 2.08% over 2018-2020, in line with the latest approved tariff for 2018, higher than our forecast of 1.5%-2.0% for the Italian consumer price index (CPI);Traffic growth of 1.3%-1.5% per year, in line with our forecasts of Italian gross domestic product growth (1.2%-1.5%);Concession fee and tolling surcharge calculated in line with concession requirements;Operating expenditure and maintenance costs in line with management's assumptions;Valdastico Nord capex starting in 2020 and completing in 2026, amounting to about €1.9 billion;Other capex related to toll stations and maintenance amounting to about €220 million over 2018-2020; Refinancing of existing €400 million notes in 2020 and additional debt raised to finance Valdastico Nord project; andDividends distribution of about €50 million per year. Based on these assumptions, we arrive at the following credit measures: FFO-to-debt of 40%-50% over 2018-2019, but declining below 20% by 2026; Debt-to-EBITDA of 1.5x-2.0x over 2018-2019, increasing to about 4x-5x by 2026; andEBITDA margin between 50%-53% in the next three years. The stable outlook on ABP reflects our expectation that the company's very strong metrics over the coming two years are temporary, supported by solid cash flow generation but also by limited capex. We believe that these ratios are not sustainable as the company will significantly increase leverage during the construction of Valdastico Nord, reducing its FFO to debt ratio below 20%. ABP's creditors also benefit from a termination value payment equal to net assets and specified in the concession contract, which we consider mitigates the refinancing risk of ABP's €400 million notes in 2020 and the risk of concession expiry in 2026 (when Valdastico Nord's construction could still be ongoing).

We could raise our ratings on ABP if the company was able to maintain FFO to debt above 20% on a sustainable basis, in particular during the construction of Valdastico Nord. Given the investment cost of about €1.9 billion, we do not see this as likely. Raising the rating would require us to have more clarity regarding the timing and costs of the Valdastico Nord construction, and the tariff increases to compensate the construction cost.

We could lower the rating if, in our view, the company was unable to maintain its FFO to debt above 13% during the construction of Valdastico Nord. This could result from higher construction cost or lower-than-expected tariff growth included in the PEF to be approved by the grantor. The company's competitive position could weaken due to the approaching concession maturity if the Valdastico Nord investment is not approved. This might not affect the rating as it is most likely going to be offset by very strong credit metrics due to limited capex.
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