DBRS Morningstar Finalises Provisional Ratings on Società di Progetto Brebemi S.p.A.

DBRS Ratings Limited (DBRS Morningstar) finalised its provisional Issuer Rating of BBB (low) with a Stable trend on Società di Progetto Brebemi S.p.A. (Brebemi or ProjectCo) and finalised its provisional ratings of BBB (low) with Stable trends on its Senior Secured Loan and Class A1 Notes, Class A2 Notes and Class A3 Notes (the Senior Notes) in an aggregate amount of EUR 1,814 million. The Senior Secured Loan and Senior Notes mature between 2033 and 2042 and are part of the EUR 2,040 million proposed refinancing package.

The A35 Brebemi Motorway (the A35, the Motorway or the Project) is a controlled-access, two- to three-lane dual carriageway highway, spanning 62.1 kilometres (km) between Milan and Brescia in Italy. The Motorway comprises 50.3 km of mainline, 7.3 km of dugout, 3.5 km of elevated bridges (viaducts) and 1.0 km of underground tunnel. Brebemi is the special-purpose vehicle (SPV) that was awarded the concession in 2003 to design, build, finance, operate and maintain the Motorway and associated infrastructure.

The ratings are supported by the strong economic fundamentals of the service area. The A35 serves a well-developed and large catchment area in the Lombardy region, one of the wealthiest and most industrialised areas in Italy and in Europe. The Lombardy region features above-average affluence, substantial traffic congestion, high transponder penetration, good driving and tolling cultures as well as one of the highest vehicle ownership penetrations in Europe and the world. One of the rating constraints includes traffic volume forecasting risk, as the Motorway is a toll road and relies on revenues that are sensitive to economic cycles, free alternatives, competing transportation modes, integration with the regional and national road networks and travellers’ behavioural changes.

Since its opening in 2014, traffic volumes have been below original expectations. However, traffic has improved as a result of the openings of interconnections with the Tangenziale Est Esterna di Milano close to Milan in 2015 and the Turin-Trieste Autostrada A4 (the A4) close to Brescia in November 2017, along with improvements in signage and increased penetration of navigation tools. Despite toll tariffs that are above the national average, the A35 registered the highest growth rate among all motorway concessions in Italy in 2018. DBRS Morningstar notes that Righetti & Monte Associati (the T&R Forecaster) provided a new traffic and revenue forecast (T&R Forecast), which incorporates current traffic figures, but did not produce the projections associated with the previous financing.

The Concession Agreement has a duration of 25 years and six months since the opening of the Motorway and matures in January 2040. The Concession Agreement was signed in 2007 between Brebemi and Concessioni Autostradali Lombarde S.p.a (CAL or the Grantor), which is ultimately owned by the Italian Government. DBRS Morningstar has reviewed the contractual and regulatory framework and considers it to be sound. ProjectCo is required to hand back the Motorway to the Grantor in excellent working condition at the end of the concession period, subject to the payment of the EUR 1,205 million termination amount (TA) by CAL. Under the proposed refinancing structure, the TA from CAL will be relied upon to pay the Class A3 Notes, if the cash sweep mechanisms in the structure are insufficient.

ProjectCo is currently owned by 20 shareholders, mainly active in the motorway and engineering and construction businesses. DBRS Morningstar notes that Unieco Società Cooperativa, which owns 5.4% participation in ProjectCo, is in compulsory administrative liquidation. While an opinion of non-consolidation was not provided for the transaction, DBRS Morningstar notes that the structure contains the key features that support DBRS Morningstar’s expectations regarding bankruptcy remoteness as outlined in its rating methodology. ProjectCo has been structured as a SPV and its activities are limited to managing the Motorway, updating the toll tariff rates as well as carrying out ordinary and extraordinary maintenance and repair works, among other tasks.

ProjectCo is required to maintain separate bank accounts and the financing documentation contains limitations on loans and guarantees. Furthermore, the principle of substantive consolidation is not applicable under Italian law. As such, DBRS Morningstar has not applied a notching penalty.

The construction of the A35 and the A35-A4 interconnection were completed in 2014 and 2017, respectively, and the Motorway is now fully operational. Despite the authorisation to operate and the certificates of full work completion, which have already been released, the two engineering, procurement and construction contracts remain open until the provisional certificates and the Technical and Administrative Acceptance Certificates are issued. DBRS Morningstar considers this to be a primarily administrative matter with a low likelihood of materially affecting the Project. ProjectCo expects to receive the provisional certificates in Q1 2020 and the final certificates by spring 2022.

The net proceeds from the proposed transaction will be used to refinance all existing senior debt in order to fund the debt service reserve account (nine months until 2021 and six months thereafter) and the maintenance reserve account as well as to pay swap breakage and expropriation costs. Under the DBRS Morningstar Rating Case, the minimum debt service coverage ratio (DSCR) of 1.40 times (x) (excluding the DSCR for the initial two-month period ending 31 December 2019) is considered to be acceptable for the assigned ratings, along with an average DSCR of 1.70x over the forecast horizon and an adequate outcome from the sensitivity analysis. As full ramp-up is expected to be achieved in 2021, DBRS Morningstar considers the Project to be premature, which means that DBRS Morningstar will focus on the Project’s revenue break-even, which, at 23.4%, is near the bottom of the 20% to 40% range acceptable for a premature project. The operating and maintenance and lifecycle resiliencies at 70% and 86%, respectively, are considered acceptable for the assigned ratings.

Notes:
All figures are in euros unless otherwise noted.

The principal applicable methodology is the Rating Public-Private Partnerships (August 2019). This can be found
can be found at: http://www.dbrs.com/about/methodologies.

The primary sources of information used for this rating include the listing particulars, finance and security documents, financial model, concession agreement, traffic analysis, expert opinions on traffic and technical, audited annual accounts, and other information provided by Società di Progetto Brebemi S.p.A. to DBRS Morningstar in October 2019. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

These ratings concern a newly issued financial instrument. These are the first DBRS Morningstar ratings on this financial instrument.

DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Giuseppe Fresta, Vice President, Global Corporates
Rating Committee Chair: Tom Currie, Managing Director, Credit Practices Group
Initial Rating Date: 7 October 2019
Last Rating Date: 7 October 2019

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