Via Wolf Street

Amid a slew of problems.

By Nick Corbishley, for WOLF STREET:

Italy could be on the verge of approving rules that would make it much easier and cheaper to revoke highway concessions. And that could be very bad news for Autostrade per l’Italia (ASPI), the private toll road operator that controls more than half of Italy’s aging toll roads and which is blamed for the collapse of the Morandi Bridge in Genoa in 2018 that resulted in 43 fatalities and left 600 people homeless. The regulatory uncertainty sent shares of ASPI’s parent company, Atlantia, down 10% to eleven-month lows this week.

Majority controlled by the Benetton family’s holding company Edizione, Atlantia is currently facing a criminal inquiry for potential negligence in the Morandi Bridge collapse. Atlantia happens to own the inspection company responsible for safety checks on the bridge. And those checks, it seems, were not very thorough.

Italian prosecutors recently widened their inquiry into suspected safety breaches to include more employees and viaducts than previously identified. The suspects include Atlantia subsidiaries APSI and Spea Engineering, Atlantia CEO Giovanni Castellucci and Chairman Fabio Cerchiai. If found guilty of negligence, Atlantia could face massive fines. The company already booked provisions for the disaster in its 2018 accounts, with a negative impact on its EBITDA of €513 million.

Atlantia’s troubles were compounded this week when the roof of a tunnel operated by ASPI collapsed. Thankfully, this time there were no injuries, but the timing, just days before the parliament votes on the government’s proposed measures to revoke highway concessions, could not have been worse.

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Deputy Transport Minister Giancarlo Cancelleri, a member of the ruling 5-Star Movement that has spearheaded the charge against Atlantia, said on Friday that the company had “run out of alibis” and that Rome would have to strip ASPI of its contract with the state. “I repeat: we must send a strong signal… what else must collapse to make us understand that these people did not operate with common sense?”

ASPI is a vital income-generating piece of Atlantia’s sprawling business empire, which includes overseas motorways, airports in Rome, Nice, Cannes-Mandelieu and Saint Tropez, as well as large holdings in Getlink, the Paris-based company that controls the Channel Tunnel, and the Spanish telecommunications infrastructure behemoth Cellnex. In the first three quarters of 2019, ASPI provided 35% of Atlantia’s €8.82 billion in revenues and 33% of its Ebitda (earnings before interest, taxes, depreciation, and amortization).

Now, much of that revenue and profit could be under threat. If the government’s proposed measures are introduced and the motorway concession is revoked, compensation due Atlantia could fall from over €20 billion to about €8 billion euros. According to Bloomberg, in such an event, ASPI could face bankruptcy as it would lack the funds necessary to pay back the €10.8 billion of debt it owes.

Revoking Atlantia’s contract would still mean the government would have to take on some of Altantia’s liabilities, potentially swelling Italy’s already bloated public debt (last count: 134.8% of GDP). And that is unlikely to go down well in Brussels. There’s also stiff opposition to over-penalizing Atlantia within some quarters of Italy’s fragile coalition government.

Atlantia has threatened to give back all of its highway concessions if the measures are confirmed. It has also announced that it is considering selling a stake of up to 49% in Rome airport operator Aeroporti di Roma. It might also sell off part of its stake in Spanish toll road operator Abertis and telecommunications infrastructure company Cellnex.

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But it could still face funding issues. Since acquiring part of its Spanish rival Abertis in 2018 in a €16.5 billion joint takeover with Spanish construction behemoth, ACS, and ACS’s German subsidiary Hochtief, Atlantia’s total debt pile has increased to €38 billion. A source close to the company said the loss of the motorway concession in Italy without compensation could trigger a default on €16 billion of debt belonging to ASPI and Atlantia.

The holders of that debt include the European Central Bank, which has purchased undisclosed amounts of 11 bonds issued by Autostrade and another three bonds issued by Atlantia. As both firms have, until now, been rated investment grade, their bonds have qualified for the ECB’s corporate sector purchase program, or CSPP.

But that debt is now being downgraded into junk. On Friday, Moody’s downgraded Atlantia to to Ba2, two notches into junk, after having downgraded it to Ba1 (one notch into junk) in early December, and also downgraded Autostrade to Ba1, on uncertainty surrounding the future of Italy’s road toll business. Moody’s is keeping the ratings on review for further cuts. Both firms are just one notch away from being dealt the same fate by S&P’s, which had downgraded the firms in September to one notch above junk has the firms on “credit watch negative.”

If two of the major ratings agencies — in this case, Moody’s and S&P — downgrade Atlantia to junk, it would trigger, or has already triggered, selling by bondholders that are contractually bound to hold assets of investment grade quality, including many pension funds and sovereign wealth funds. The ECB, while it is not allowed to buy junk-rated debt under its rules, is not obligated to sell debt that has been downgraded to junk.

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Atlantia would become the third high-profile company after retail giants Steinhoff and Dia to have issued large amounts of corporate debt that were hoovered up by the ECB only to then be downgraded to junk. In the case of Steinhoff, rather than continue holding those bonds on its balance sheet, the ECB ended up selling its position at a multi-million euro loss. By Nick Corbishley, for WOLF STREET.

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