Fitch Affirms Ferrovie dello Stato Italiane BBB+; Stable Outlook
OREANDA-NEWS. Fitch Ratings has affirmed Ferrovie dello Stato Italiane's (FS) foreign and local currency Long-Term Issuer Default Ratings at 'BBB+' with a Stable Outlook. Fitch has also affirmed FS's EUR4.5bn Euro medium-term note programme (EMTN) and bond issues (XS1004118904 and XS0954248729) at 'BBB+'.
The affirmation takes into account the government's plans for a 40% privatisation in 2016 of the holding company or its commercial railway businesses. It also reflects the application of Fitch's 'Rating of Public Sector Entities - Outside the United States' criteria.
FS is the holding company for Italy's national railway group, providing transport services and infrastructure management, among other things. FS's group profitability and indebtedness remain in line with Fitch's base- case scenario amid expectations that the partial privatisation will not diminish its integration with the Italian public sector or its key role in national infrastructure development. This implies a high probability of extraordinary support from the national government, in case of need.
KEY RATING DRIVERS
Fitch expects nearly 40% of FS's annual income over the medium term to come from Italy's national and regional governments, with each contributing about EUR1.8bn for transport services and maintenance of the rail network. Services paid by regions are opening up to competitive tender. But the two- to-three-year lag between the launch of the tender process and the provision of services by rivals to FS subsidiary Trenitalia should ensure regional fees remain stable over the medium term. However, FS and Trenitalia remain exposed to a reduction of resources as the national government and the transport authority push regions to cut back on fees they pay for transport services.
Guarantees and subsidies of about 50% of FS's debt and funding of capital spending for the entirety of non-high speed rail network, or roughly 50% of FS's total investment, also underscore FS's links with and strategic importance for the national government. Moreover, monthly draw-down forecasts on the account held with the Bank of Italy (where government transfers are paid to FS) are instrumental to monitoring liquidity buffers. Together with the cash pooling at the holding company (issuer of the bonds under the EMTN programme), the liquidity account with Bank of Italy mitigates risks of structural subordination of lenders of the holding company to those of operating subsidiaries as 55% of FS's debt is on the holding company's balance sheet amid a small unconsolidated income stream. A revolving credit line of up to EUR1.5bn also cushions against unpredictable cash needs and mitigates liquidity risks stemming from EUR1.2bn average annual principal due by FS in 2015-2021.
The ratings also consider FS's good standalone profile, underpinned by its market shares of 90% in conventional rail and 80% in high speed rail in the Italian market, offsetting cyclical revenue in freight operations. Fitch expects FS's revenue to edge towards EUR9bn over the medium term from EUR8.4bn in 2014 as growing revenue from abroad and fare revenue from passengers offset stagnant revenue from the public sector. Foreign activity for engineering services and public transport in Germany rose to 10% of total turnover from 6% in 2014 while passenger growth is expected to rise to 1%-2% this year. In 2014, the FS group recorded net profit of EUR303m and an EBITDA margin of 25%. However, potential curtailment of revenue from the public sector may compress FS's profitability towards Fitch's baseline scenario of about EUR200m, or an EBITDA margin of about 22%, over the medium term.
Fitch expects EBITDA/interest expenses and debt-to-EBITDA to remain around 6x-8x and 5x-6x respectively, in line with ratios for public sector transport companies in the 'BBB' rating category. FS's consolidated debt in June 2015 stood at nearly EUR12bn with annualised net debt/EBITDA of 5x. Fitch expects debt to remain in the range of EUR12bn-EUR13bn over the medium term, as the 2015-2017 plan envisages EUR20bn of capital spending, which will be only partly debt funded.
FS's ratings and outlook will continue to mirror those of Italy in light of the credit linkage. Weaker sovereign links, such as dilution of government control or financial support, leading to higher than expected growth of the group's debt or a material shrinkage of the liquidity cushion could be negative for the ratings. The unbundling of the group with a loss of revenue stability or income losses could also be rating negative, unless offset by other forms of government support.