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

The rating affirmation considers MSMT's diminishing liquidity pressure and the possible downsizing of its capex plan that, if approved by the grantor as proposed, will improve issuer capital structure. The rating action also considers the increasing political and financial support that MSMT and its 79%-owned subsidiary Autostrada Pedemontana Lombarda (APL) is gaining after the recent step-in - as indirect controlling shareholders - of Finlombarda, the financial arm of Region of Lombardy. APL is a financially-strained EUR5bn greenfield project that, if further materially supported by MSMT, could jeopardise the overall economics of MSMT's concession.

The Negative Outlook reflects uncertainty over the grantor's approval of the downsizing of MSMT's direct investment plan as well as the lack of visibility on the additional financial support MSMT could provide to APL.

KEY RATING DRIVERS

MSMT has recently proposed to the grantor the downsizing of its direct investment plan (to EUR380m from EUR700m) in exchange for lower tariff hikes. The downsizing of the business plan, if approved as proposed, 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.

The Pedemontana project is under severe financial stress. 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 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 willing to provide additional funds to APL, further material financial support cannot be ruled out if APL project continues to be managed with a short-term financial view.

APL has still significant financial needs. A first part of the project (35%) was recently delivered (May 2015) but additional funding requirement of around EUR3bn is still 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. Traffic figures are showing signs of stabilisation: up 0.65% in 1Q15 and 0.7% in 2014, after falling in 2012 and 2013 due to the effect of the government's austerity measures. Under Fitch's updated rating case, traffic should grow1.5% in 2015, sustained by Milan EXPO, and remain subdued thereafter. The downside risk of this scenario mainly relates to the still evolving Italian economy and its impact on traffic dynamics.

Price Risk- Midrange
Tariff increase in 2015 (1.5%) was lower than expected but the concessionaire should be compensated with an 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 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 longstanding experience in delivering investment on its network but its growing involvement in APL greenfield project and uncertainty over the size of its direct investment programme constrain the Infrastructure Renewal attribute to Midrange

Debt Structure - Weaker
Despite possible capex downsizing, MSMT will remain dependent on external funding to cover its direct and indirect investment needs and repay its maturing debt.

Existing bank debt is unsecured, carries mostly floating rates (78%) but benefits from a financial covenant package comprising leverage and capital structure ratios. The new management and Finlombarda are taking steps to improve MSMT's stretched liquidity position. The EUR72m bridge loan due at end-March has been rolled over to September 2015 and two new five-year amortising loans are being arranged to refinance the bridge loan, fund MSMT capex plan and provide what management has said would be the last (EUR50m) equity injection in APL. The new facilities include leverage covenants which we understand from management will be replicated in future debt-raising activities.

MSMT's plan to use a single large bullet debt would weaken its current debt structure (predominantly amortising) and expose it to refinancing risk, given that the company has never tapped capital markets. The Debt Structure attribute 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 traffic 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 Pedemontana and a weaker debt structure.

RATING SENSITIVITIES

The rating could be downgraded if MSMT's downsized business plan is not approved as proposed and/or further large financial support is or expected to be provided to APL.

Failure to maintain adequate liquidity to cover its investments and debt service requirement could also prompt a negative rating action as could any loosening of covenants on current and future debt.

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

Grantor approval of MSMT's downsized business plan and a clearer view on MSMT's financial support to APL could be rating-positive.