OREANDA-NEWS. Fitch Ratings has affirmed Italian toll roads operator Milano Serravalle-Milano Tangenziali's (MSMT) senior unsecured Long-term debt rating at 'BB+'. The Outlook is Negative.

The rating affirmation reflects MSMT's solid traffic performance in 2015 and our view that the re-profiling of the company's direct investment plan recently agreed with the grantor will allow MSMT to maintain its peak leverage below the 5x mark over the next five years.

The rating also factors in the lack of visibility on the additional financial support MSMT could provide to its financially strained 79%-owned subsidiary Autostrada Pedemontana Lombarda (APL). Further material support to APL - which is a EUR5bn greenfield project - could jeopardise the overall economics of MSMT's concession.

The Negative Outlook reflects MSMT's reliance on external financing to cover the company's direct and indirect investment plan and forthcoming debt maturities. Under the Fitch rating case, available liquidity will be sufficient to cover debt maturities falling due in 2016.

KEY RATING DRIVERS

MSMT has recently agreed with the grantor a significant re-profiling of its direct investment plan. The agreement, which is expected to be formalised shortly, envisages both lower capex and slower tariff increases until 2017, in exchange of more investments and larger tariff hikes from 2018 onwards. The smoother capex plan reduces MSMT's external funding requirement and leverage peak.

Under the revised Fitch rating case, which incorporates the re-profiled capex plan and tariff hikes, MSMT's peak leverage will remain below the 5x mark over the next five years. Concession debt is repaid three years ahead of concession maturity (2028).

APL's project is under severe financial stress. The original traffic forecast has been revised materially lower and banks involved in the project (as shareholders and lenders) have provided no further equity or new financing.

The EUR200m bridge loan for the project was regularly overdue as lenders granted only short-term maturity extensions (latest extension was up to January 2018). To keep the project running, MSMT has materially increased its exposure to APL since 2012. Despite MSMT not being willing to provide additional funds to APL, further material financial support cannot be ruled out if the APL project continues to be managed with a short-term financial view.

APL has significant financial needs. The first part of the project (around 35%) was delivered in May 2015 and is now operating, but additional funding requirement of around EUR3bn is still needed to complete the remaining part of the project. We expect that the involvement of the Region of Lombardy in the funding discussion on APL should contribute to a clearer, long-term view on APL's future capital structure.

Volume Risk - Midrange

From an operational standpoint, MSMT has outperformed Fitch's expectations. Traffic returned to growth in 2014 and 2015 (0.7% and 2.7%, respectively) after falling 6.3% in 2012. Under Fitch's updated rating case, traffic will moderately grow over the 2016-2020 period (CAGR 0.8%), sustained by a stabilising Italian economy and favourable consumption trend.

Price Risk - Midrange

Tariff increase in 2015 (1.5%) was lower-than-expected and tariffs for 2016 have been frozen pending the final approval of MSMT's updated business plan. The grantor is, however, committed to allowing MSMT to recover the tariff shortfall when the updated business plan is formally approved. Under the new business plan, tariff hikes will be capped at 1.5% until 2017 but lower concession flows will be offset by capex reduction in the current regulatory period. Lower tariff increases would limit the risk of price elasticity on MSMT network. The price risk attribute is therefore assessed as midrange.

Infrastructure renewal - Midrange

Under the concessionaire's updated business plan, MSMT is expected to deliver a capex programme of around EUR700m over the concession period. MSMT has a long-standing experience in delivering investment on its network but its growing involvement in APL greenfield project constrains the infrastructure renewal attribute to Midrange

Debt Structure - Weaker

MSMT depends 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 (74%) but benefits from a financial covenant package comprising leverage and capital structure ratios. Liquidity is on a downward path. Under Fitch's rating case, unrestricted cash available as of end-2015 will be sufficient to cover debt maturities in 2016. Debt structure is assessed as weaker.

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

RATING SENSITIVITIES

The rating could be downgraded if further large financial support is provided (or expected to be provided) to APL.

Current APL debt is without recourse to MSMT but a change to this set-up (i. e. MSMT extending any form of guarantee on APL's debt) may prompt a downgrade, possibly by several notches.

Failure to fully prefund MSMT debt maturities well in advance could also prompt a negative rating action as could any loosening of current covenant package on current and future debt or any material reduction of the company's equity cushion.

The Outlook may be revised to Stable if pressure on MSMT's liquidity eases.

SUMMARY OF CREDIT

MSMT is a toll motorway operator running, under a concession agreement, a motorway network of 184.6 km around Milan (Italy). It owns a 79% stake in a large greenfield toll road project (increasing to 86% when the shareholder loan is taken into account).