London, 17 October 2017 -- Moody's Investors Service, ("Moody's") has
today affirmed the (P)Baa2 rating of the euro medium-term note
(EMTN) programme of 2i Rete Gas S.p.A. (2i RG).
Moody's also affirmed the company's Baa2 senior unsecured
ratings and the Baa2 long term issuer rating. The outlook on all
ratings remains stable.
RATINGS RATIONALE
Today's rating action follows the announcement on 13 October that
2i RG finalised an agreement to acquire Nedgia S.p.A.
(Nedgia, unrated) and Gas Natural Italia S.p.A.
(GNI, unrated) from Gas Natural SDG, S.A. (Gas
Natural, Baa2 Stable), for an enterprise value of EUR727 million.
Nedgia is the seventh largest gas distribution operator in Italy by connection
points whilst GNI provides corporate services to Nedgia and to other subsidiaries
of Gas Natural in Italy. The acquisition is subject to customary
approval from relevant antitrust authority, and the financial closing
is expected to take place between Q4 2017 and Q1 2018.
The rating affirmation reflects: (i) Moody's view that the
transaction does not alter 2i RG's business risk profile,
given the regulated nature of essentially all the assets acquired;
(ii) the rating agency's expectation that, although the transaction
will result in a weakening of 2i RG's ratios, the group's
credit metrics will remain at a level commensurate with the Baa2 rating.
Nevertheless, the acquisition will absorb 2i RG's existing
financial flexibility leaving no headroom vs. the ratio guidance
for the current Baa2 rating.
In Moody's view, the acquisition represents a strong strategic
fit for 2i RG which will consolidate its position as second largest player
in Italy and increase its market share to 19% (vs. 17%
at 2016 YE). Through the acquisition, 2i RG will strengthen
its geographic footprint in Southern and Central Italy, where the
company is already present thanks to a diversified network of concessions
spread across the whole country, but will also increase its market
share in regions, such as Sicily, where it currently has a
more limited presence. The transaction perimeter also includes
the acquisition of GNI. As Moody's expects the EBITDA coming
from GNI to be marginal (< EUR1 million), these assets will not
affect the rating agency's assessment of the risk profile of the
acquired assets.
Upon successful completion of the transaction, 2i RG's regulatory
asset base ("RAB") will increase by EUR555 million in 2018.
The regulatory framework governing the assets acquired matches that currently
applied to 2i RG. The rating agency continues to consider the regulation
for gas distribution activities in Italy as stable and overall supportive,
featuring a fair degree of cost recovery and capital remuneration,
and characterised by the absence of any exposure to volumes.
From a financial perspective, Moody's anticipates the transaction
to fully absorb 2i RG's existing financial flexibility and to result
in a permanent weakening of its key credit metrics from 2018 onwards.
This is because 2i RG plans to fund the agreed price consideration (EUR727
million) entirely through debt, and in particular through the issuance
of a bond of about EUR700 million. However, should current
market conditions change, the transaction will be funded through
a bridge to bond facility with maturity of at least twelve months (with
the option to extend it by further six months) for which the commercial
arrangements are already in place. Moody's would expect this
facility to rank pari passu with all the other senior unsecured debt of
2i RG.
Moody's therefore says that 2i RG's financial profile will
weaken from 2018 onwards relative to historical levels. The increase
in leverage is partly mitigated by: (i) a reduction in 2i RG's
regulatory receivables in 2017 and 2018, as the rating agency understands
that this will be driven by the change in the frequency of payments received
from CSEA ("Cassa per i Servizi Energetici ed Ambientali");
(ii) the efficiencies that 2i RG achieved in the months to September 2017
and the additional savings (relative to the EUR104 million already included
in the plan) of EUR13 million that the management expects to extract from
the acquisition and which Moody's believes the company is well-positioned
to achieve; (iii) lower net investments over the 2017-21 period
to reflect a shift to 2023 (vs. previous 2021) of the assumed tender
period; and (iv) a lower dividend payout ratio in the two years following
the acquisition (2019-20).
Following the acquisition, Moody's anticipates 2i RG's
FFO/Net debt to fall below 12% and Net debt/fixed assets to increase
to around 85% (vs. around 14% and 80%,
respectively, expected in 2017, net of extraordinary items).
These are levels that are commensurate with the guidance for the current
Baa2 rating, which includes FFO/net debt above 10% and Net
debt/Fixed assets no higher than 85%. Moody's nevertheless
notes that 2i RG will have limited financial flexibility to absorb potential
future headwinds.
RATIONALE FOR STABLE OUTLOOK
The stable outlook is based on Moody's expectation that 2i RG's
credit metrics will remain commensurate with the guidance for the Baa2
rating (i.e. FFO/net debt above 10% and Net debt/Fixed
assets no higher than 85%), and that the company will maintain
financial and investment discipline and could take measures to reduce
leverage if needed.
The stable outlook also continues to reflect the fact that 2i RG could
be rated one notch above the Government of Italy (Baa2 negative),
reflecting the limited exposure of regulated gas distribution activities
to the economic cycle.
WHAT COULD CHANGE THE RATING UP/DOWN
Given Moody's view that the Baa2 rating of 2i RG will be weakly positioned
following the closing of Nedgia's acquisition, upward rating
pressure is unlikely in the medium term. The ratings could nevertheless
be upgraded if 2i RG's financial profile were to improve so that
FFO/net debt is comfortably in the mid to high teens in percentage terms,
retained cash flows (RCF)/net debt is in the double digits in percentage
terms and Net debt/Fixed assets is below 70%. A resilient
macroeconomic environment would be a precondition to upgrade 2i RG.
Conversely, 2i RG's ratings would come under downward pressure
if (i) the company failed to demonstrate a financial profile in line with
the guidance discussed above, for example as a result of operating
performance shortfalls or increased investments, including in gas
tenders or M&A; or (ii) adverse regulatory developments,
evidence of political interference or discriminatory fiscal measures were
to negatively affect 2i RG's credit risk profile.
The principal methodology used in these ratings was Regulated Electric
and Gas Networks published in March 2017. Please see the Rating
Methodologies page on www.moodys.com for a copy of this
methodology.
2i Rete Gas S.p.A. is the second-largest operator
in the Italian gas distribution sector. In 2016, the company
reported EUR400 million EBITDA and a net debt of EUR2.0 billion.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Alessandra Mac Donald
Analyst
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Paul Marty
Senior Vice President/Manager
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
