OREANDA-NEWS. Fitch Ratings has affirmed Trentino Sviluppo's (TS) Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'A-' and Short-term foreign currency IDR at 'F2'. The Outlooks are Stable.

The affirmation and Stable Outlooks reflect Fitch's expectation that TS's financial profile will remain sound in the medium term, thanks to the potential extraordinary support from the Autonomous Province of Trento (PAT, A/Stable), which is TS's sponsor in case of need.

KEY RATING DRIVERS
Links to PAT
TS is fully owned by PAT, which has extensive control and oversight over its operations. TS has moderate strategic importance and integration to PAT, as mirrored by the lack of an explicit guarantee of all its liabilities. Nevertheless, Fitch believes that extraordinary support from PAT would be highly probable and timely, in case of need. Therefore, TS is classified as a credit-linked public-sector entity under Fitch's criteria and its ratings are notched down one level from those of PAT.

After the incorporation of PAT-owned Trentino Marketing in 2012 and the spin-off of most of its operations in 2013 (followed by a similar transaction in 2014 involving totally-owned companies), TS may be used to implement other extraordinary transactions in the foreseeable future, reflecting the sponsor's intention to streamline its provincial integrated public finance system and create possible synergies among the different companies. In these circumstances, as with Trentino Marketing, Fitch believes that TS's credit profile would not be materially altered.

Strategic Importance
TS's core mandate is to manage provincial funds (the main one being Fund 33-34) on behalf of PAT, which provides a fee for this activity. The 10 provincial funds under management, with assets totalling EUR1.15bn at mid-2015, have their own balance sheets and separate income statements from those of TS and a funding structure largely based on resources granted from PAT.

The funds managed on behalf of PAT are segregated from TS's assets and are reported under the line of PAT's balance sheet. Therefore, in the event of the funds' insolvency, creditors would be satisfied only against the specific funds' assets, leaving TS's balance sheet unaffected. In the case of insufficient assets in a fund to satisfy potential creditors, no recourse to PAT's and/or to TS's assets is formally envisaged. However, Fitch believes PAT could decide to intervene and repay creditors of the funds.

Control and Oversight
The relationship between TS and PAT is regulated by an agreement (the Convenzione), covering issues pertaining operations, investment as well as borrowing decisions, and also appoints the board of directors and auditors. TS's mandate is the provision of services to support local companies through the purchase, sale and leasing of assets, operated via equity injections and/or, mostly, via financial leases.

Sound Creditworthiness amid Growing Debt
Fitch expects TS's financial profile to remain sound in the medium term with a balanced income statement. The entity is highly capitalised (EUR200m equity, or about 60% of total assets) and a large portfolio of real estate assets (around EUR200m). TS receives rents generated from the Fund 33-34 portfolio of assets to service this direct borrowing. In case of insufficient rental income, the Provincial Law 6/99, art 33, 8ter, states that PAT would cover the gap, although the top-up guarantee may not be available on credit lines not originated under back-to-back transactions.

In order to keep the Funds 33-34 investment plan unaffected at EUR150m in 2015-2017 despite decreasing provincial subsidies, TS may decide to step in through direct borrowing, with a bond programme of EUR80m, likely split throughout 2016 and 2017. Consequently Fitch believes that total long-term debt will hover at EU100m in the medium term.

RATING SENSITIVITIES
TS's IDRs are credit linked to those of the PAT; therefore its ratings are sensitive to any change in the sponsor's ratings.

More formalised support from PAT, such as an explicit guarantee on all financial liabilities, could trigger an upgrade of TS's ratings, leading to rating equalisation with PAT. Conversely a dilution of PAT's support as evidenced by unsubsidised borrowing or income losses not compensated by support from PAT may lead to a downgrade, thereby widening TS's rating notch differential from its sponsor.