Fitch Ratings has assigned French water-network operator Holding d'Infrastructures des Metiers de l'Environnement's (SAUR; BBB-/Stable) EUR950 million of senior unsecured sustainability-linked notes a final rating of 'BBB-'.

The issued notes are in two tranches: EUR450 million due in September 2025 with a coupon of 0.125% and EUR500 million due in September 2028 with a coupon of 0.625%.

The notes are issued under the industry's sustainability-linked financing framework. The coupons of the notes are adjusted, depending on defined reductions to both carbon intensity and water withdrawals per subscriber.

The notes are listed on the Global Exchange Market of Euronext Dublin and the net proceeds are being used to repay existing senior facilities and for general corporate purposes. The final ratings are in line with the expected ratings assigned on 6 September 2021 and follows the receipt of documents conforming to information previously received.

Key Rating Drivers

Instrument Rating in Line with IDR: The ratings on the senior unsecured sustainability-linked notes are in line with SAUR's Long-Term Issuer Default Rating (IDR) of 'BBB-', as the notes constitute unconditional, unsubordinated and unsecured obligations of the company and at all times rank at least equally with all its other present and future unsecured and unsubordinated indebtedness.

Largely Contracted Water Operator: The IDR reflects SAUR's low business risk as an integrated water and wastewater network operator that largely operates in France and Iberia, with the majority of revenue supported by long-term contracts with municipalities, in turn limiting volume and price risks. This is complemented by rising revenue from more profitable water-related works and projects, although with shorter contract terms.

Shareholder's Commitment to Deleverage: The ratings also take into account Fitch's expectation that the company's funds from operations (FFO) net leverage will decline to below 5.0x for 2021-2025, a level that is consistent with the 'BBB-' rating. This is supported by strong commitment from EQT Infrastructure, SAUR's controlling shareholder.

Derivation Summary

SAUR is France's third-largest water and wastewater management company in France, behind Veolia, and Suez. The latter two companies are larger in scale and benefit from more geographically and diversified business profiles. In the water sector, these peers also benefit from larger and more profitable contracts, which explains their higher profitability even though they operate under the same contractual framework as SAUR. This drives a higher debt capacity of 5.0x at 'BBB' for Veolia against 5.0x at 'BBB-' for SAUR.

FCC Aqualia S.A. (BBB-/Stable), the Spanish water concessions operator, is SAUR's closest peer in business mix and scale. Aqualia's municipal concessions and O&M account for about 90% of EBITDA, compared with around 80% for SAUR. We also regard concessions in Spain and Portugal as stronger, given financial equilibrium provisions that protect the value of concessions under certain circumstances. We believe France's regulatory framework for water and wastewater is less predictable than that in the UK and Italy, considering the latter two countries' independently regulated and consultative frameworks and longer licensed concession duration.

Overall, we see Aqualia's business risk profile as slightly better than that of SAUR, with longer average concession residual life, higher renewal rates, better profitability due to higher capex intensity, and a contractual framework that includes financial equilibrium mechanisms. This allows for a greater debt capacity at the same rating level; 5.3x for FFO net debt at Aqualia compared with 5.0x for SAUR.

Key Assumptions

Consolidated revenue CAGR for 2020 (excluding the Aquapor acquisition) to 2025, of about 5%, supported by stable renewal rates and by prices under existing municipal water contracts rising by CPI or by reference to costs. The Iberian and the industrial segments to out-perform the average.

Renewal rate of water concession in line with historical trends

Fitch-calculated consolidated EBITDA margin to improve around 200bp by 2025; this is pre IFRS 16 and after exceptional costs and Fitch's adjustments. The improvement will be driven by efficiency gains and gradually falling exceptional costs linked to restructuring programmes

Average capex of about EUR150 million a year over 2021-2025 and limited M&A of EUR85 million in 2022

No dividends to 2025

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

FFO net leverage below 4.2x, coupled with a gradual EBITDA margin improvement in line with Fitch's expectations

Factors that could, individually or collectively, lead to negative rating action/downgrade:

FFO net leverage above 5.0x, for instance, due to delays in implementing the business plan or large M&A without offsetting measures

Increased earnings volatility within SAUR's business portfolio not adequately offset by lower financial risk. This could arise from variations in public-contract agreements or the regulatory framework, or from a significant increase in higher-risk contracted exposure.

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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Adequate Liquidity: Liquidity is enhanced by the medium- to long-term structure of SAUR's financing package, which comprises a bullet EUR250 million revolver credit facility (RCF) with a tenor of 4.5 years and the EUR950 million sustainability-linked notes maturing in 2025 and 2028.

Fitch-calculated readily available cash of EUR119 million at end-2020 (June 2021: EUR223 million), together with the RCF and a capital injection of more than EUR100 million in January 2021 to support the Aquapor acquisition, fully covers SAUR's capex and limited M&A needs to 2025. This also takes into account overall neutral- to -slightly positive free cash flow generation and no relevant debt maturities until 2025.

SAUR is a highly cash-generative business that benefits from a negative net working-capital position. This is due to the structural features of the water business in France, including end-user taxes collected by SAUR on behalf of municipalities. This lowers the need for external liquidity support compared with other European peers.

Centralised Debt Structure: The sustainability bonds and RCF, which represent more than 90% of SAUR's total debt, are placed at the non-operating holding company and are on-lent to operating subsidiaries. None of the subsidiaries are defined as guarantors for the instruments, but negligible prior-ranking debt and the lack of dividend upstreaming restrictions at the subsidiary level eliminates the possibility of structural subordination.

Issuer Profile

SAUR is an integrated water and wastewater treatment and distribution operator. It also provides engineering and procurement and other water-related works. It serves more than 20 million residents and 7,000 municipalities and industrial companies. SAUR has a 16% market share in France, well behind the two largest peers - Veolia and Suez - and is the third-largest private water company in Iberia.

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

RATING ACTIONSENTITY/DEBT	RATING		PRIOR

Holding d'Infrastructures des Metiers de l'Environnement (SAUR)

senior unsecured

LT	BBB- 	New Rating		BBB-(EXP)

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

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