Fitch Ratings has affirmed Italian utility
The Outlook on the IDR is Stable. A full list of ratings is detailed below.
The affirmation reflects Snam's solid business profile, with almost fully regulated domestic activity, a proactive approach towards energy transition, and various equity stakes in resilient assets, which could represent options to rebalance the financial structure, if needed.
Snam's funds from operations (FFO) net leverage is tight for the rating in 2022-2023 (close to the negative sensitivity at 7.3x), but we expect a solid net debt/regulatory asset base (RAB) and see some upside to our current conservative forecasts. Snam's upcoming business plan will be key for the future trajectory of the ratings.
Key Rating Drivers
Solid Current Trading: Snam reported broadly stable EBITDA of
Upside from High Inflation: The Italian regulation foresees a return on RAB based on a real weighted average cost of capital (WACC), with annual updates of the RAB and the operating spending base to factor in inflation, albeit with a time lag. In the current inflationary environment, these features are positive especially for the trend of net debt/RAB, which we estimate at around 55% in 2022. In 9M22 the RAB deflator stood at 3.7%. We expect a moderate increase in allowed WACC from 2024 after no change next year, mirroring the current interest-rate forwards.
Cost of Debt to Rise: Snam's cost of debt, currently very low at 1%, will increase only gradually, as around 75% of its existing gross debt is fixed-rate and its long-term debt has an average maturity of 5.7 years.
New Strategic Plan Upcoming: After the appointment of a new CEO in
High Capex Needs: We believe that the recent disruption of the gas market could ultimately result in higher capex for Snam. In particular we would expect it to take into account capex to install two floating storage regasification units (FSRU) in
Derivation Summary
Snam has a robust business profile with negligible price and volume risk that is similar to
Snam has the same rating as the large and diversified
Key Assumptions
Fitch's key assumptions within our rating case for the issuer include:
Flat WACC for 2022-2023, with around a 50bp increase from 2024
Neutral working capital trend across 2022-2025
Capex for 2022-2025 broadly in line with the previous business plan
No sizeable M&A to 2025
Cost of new debt at around 4% to 2025
Dividends in line with management policy
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
FFO net leverage declining below 6.5x on a sustained basis
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Deterioration of FFO net leverage to above 7.3x, FFO interest coverage to below 4.0x or net debt/ (RAB+ associates) approaching 67% over a sustained period, for instance, as a result of higher-than-expected investments or adverse financial policy measures
Growing exposure to unregulated activities, upward revision to Snam's dividend policy or material debt-funded acquisitions abroad, without any offsetting measures
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Adequate Liquidity: As of
Issuer Profile
Snam is
Criteria Variation
Fitch views the contractor business of Italian utilities in the context of approved eco-bonus on the energy requalification of buildings as a pass-through item. This is mainly due to a clear recovery framework through tax credits in following years.
In light of the extension of most of these bonuses and their presence in Snam's business plan, we reverse the impact on leverage metrics caused by related investments/working-capital drains.
The one-notch uplift for higher expected recoveries on senior unsecured debt instruments issued by economic-regulated utilities has not been applied to Snam as this would have resulted in the instrument rating exceeding
Rating the utility's unsecured debt instruments above the sovereign IDR would suggest that recoveries would remain above average in a highly depressed sovereign environment. Fitch believes however that higher rates of recoveries for utilities' senior debt are less predictable in a weaker sovereign environment than in an idiosyncratic default of any single utility, making the standard uplift inappropriate in this case.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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