The long-lasting and costly dispute over the concession under which the Morandi bridge in Genoa was operated, before it collapsed in August 2018, may at last be approaching resolution. On May 31, 2021, Atlantia SpA will hold a meeting with shareholders to gauge their view on the latest binding offer submitted by the consortium led by state-owned Cassa Depositi e Prestiti (CDP) for the acquisition of Atlantia's subsidiary Autostrade per I'Italia SpA (ASPI), the bridge operator.

It is not yet certain whether Atlantia's board of directors will accept this offer following the shareholder meeting. If it does not, it is unclear what will happen next. Spain-based construction company ACS has also expressed an interest in ASPI. However, it has not submitted any offer, and in any case, would need to work in partnership with CDP as agreed in the framework agreement announced by the Italian government in July 2020.

Since the collapse, S&P Global Ratings has lowered its long-term ratings on Italy-based ASPI and its parent Atlantia by five notches to 'BB-', with a developing outlook, based on the risk that the ASPI concession could be terminated or renegotiated on conditions that are more unfavorable for the operator.

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So far, we have equalized our ratings on ASPI and Atlantia, based on the strong financial and operating ties between the two companies. A change in ownership would likely decrease the credit risks ASPI is exposed to, given that CDP has a close relationship with its ultimate owner, the Italian government, and is thus indirectly linked with the grantor. Following the disposal, we expect to separate the two ratings and assign a stand-alone credit profile to ASPI.

We will consider various factors in deciding whether ASPI's creditworthiness is sufficient to support an investment-grade rating. If the concession framework moves to a regulated-asset base (RAB) model, it will be positive for the rating, but steep rises in maintenance spending will weigh on metrics in the coming years. The timing of the settlement agreement and the effectiveness of the potential disposal remain uncertain, and ASPI's exposure to legacy risk will not be clear until after the disposal and the settlement agreement have been finalized.

Legacy risk could also weigh on our rating on Atlantia. The disposal proceeds of €8 billion, as per the binding offer for its 88% stake in ASPI, would more than outweigh its current external debt of €3.75 billion (pro forma figures as of March 31, 2021). This would help Atlantia reduce its leverage and leave room for potential acquisitions. That said, the large amount of debt within its subsidiary Abertis (€29.1 billion gross external debt as of Dec. 31, 2020) is going to depress its consolidated figures. As a holding company, our rating on Atlantia considers the quality of the assets in its portfolio and its access to their cash flows; Abertis, for example, is controlled with a 50% plus one share. The finalization of the settlement agreement on ASPI would remove the liquidity risk that depresses the current rating.

Here, we address in more detail some of the questions we have received from market participants about our ratings on ASPI and Atlantia and the potential rating impact on our ratings on Atlantia's subsidiaries, Aeroporti di Roma SpA (AdR) and Abertis Infraestructuras S.A.

Frequently Asked Questions

How do governance and regulatory risks affect our ratings on ASPI and Atlantia?

Even though it accounted for less than 1% of ASPI's revenue, the Genoa bridge collapse had significant ramifications. These included direct costs to re-build, tariff forbearance, and an increase in maintenance expenditure for its operator, leading to a €3.4 billion total settlement amount with the grantor. For the parent company, the collapse led to a stipulation that it dispose of its operating subsidiary ASPI. The adverse consequences highlight the heavy weight of governance and regulatory aspects on concession-based infrastructure operators.

Unilateral changes were introduced under article 35 of Law Decree 162/2019, which made it possible to terminate a toll road concession before the operator receives any compensation. Compared with the terms of ASPI's original concession, it also made the termination payment less costly for the grantor. These regulatory changes, which led to the launch of an informal dialogue between the European Commission and the Italian government in January 2021, created difficult-to-predict liquidity and legal consequences for ASPI and Atlantia in the event of a concession termination. As a result, we downgraded both companies to speculative-grade in January 2020.

The collapse of the Genoa bridge prompted the government to increase its scrutiny of and focus on maintenance, to promote safety. Although this is positive for the long-term balance of risks between the public and private parties, these actions have material direct financial effects on Italian toll road operators. For example, in the aftermath of the collapse, the Italian grantor did not approve any increases in annual tariffs for operators that had not delivered the maintenance included in their economic and financial plans (PEFs). It also aims to more consistently implement a RAB model across toll road concessions, which would reduce remuneration of operators' investments. The latest PEF that ASPI submitted to the grantor includes €7 billion in maintenance expenditure to improve the quality of the network and €13.2 billion in planned capital expenditure (capex) by 2038. This underpins our expectation that, on average, ASPI will spend more than its peers.

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No matter how strong the contractual protections, a collapsing bridge can cost you the business. In this case, although the ASPI concession has not been terminated, Atlantia's dispute with the grantor is leading to a settlement that includes the disposal of a core business for the parent company. ASPI had been the largest cash flow contributor to Atlantia's group and, until August 2018, was one of Atlantia's most important sources of dividends.

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The costs of social responsibility are high and pervasive. Immediately after the collapse, ASPI pledged €500 million in support. It suspended toll collection in Genoa and offered a fund to support the casualties' families and the City of Genoa, in addition to rebuilding the bridge. Over time, the cost of these measures, including additional nonremunerated capex, has increased to €3.4 billion. It is included in the settlement ASPI expects to finalize with the grantor.

Infrastructure operators have a duty to care that extends beyond the company to encompass employees and top management. Some employees of ASPI and Atlantia's subsidiary SPEA, responsible for the monitoring of the network, were arrested in September 2019. The arrests followed allegations that they misreported or omitted information about the safety of some bridges within ASPI's network in reports to the grantor. This increased scrutiny of internal procedures and controls. The focus on governance has led, among other things, to the appointment of new CEOs at both Atlantia and ASPI and new independent directors within ASPI's board of directors. All in all, this caused us to revise our assessment of Atlantia and ASPI's management and governance score to fair from satisfactory.

Given that the CDP consortium has submitted a binding offer for ASPI, when will we delink our ratings on Atlantia and ASPI?

In order to separate the two ratings, we would expect the existing guarantees and cross-default provisions between the two companies to be released, in addition to the operating separateness stemming from the disposal. This would require a waiver from certain ASPI bondholders to release Atlantia from the financing guarantees it provides to some of ASPI's bonds (originally issued by Atlantia and then downstreamed to ASPI, totaling about €3.8 billion, which would remain as ASPI debt) and, at the same time, the approval from Atlantia's bondholders of the ASPI change of control. To date, these financial ties have underpinned our equalization of the two ratings.

For the ASPI disposal to be effective under the planned transaction, supporting the delinkage, these waivers must be received, the grantor must approve the latest PEF submitted from ASPI, and ASPI must sign a settlement agreement with the grantor.

We expect the close relationship between CDP and the Italian government to pave the way for the approval of a settlement agreement with the grantor, which would ultimately remove the risk that the concession could be terminated or revoked. Approval of ASPI's disposal is also due by the Italian Ministry of Infrastructure and Transportation. This would include a decision not to exercise the Italian Prime Minister's golden power rights; these can be exercised when strategic Italian companies see a change of control.

After a successful disposal, could ASPI be rated investment-grade?

At present, the liquidity risks associated with the lack of a settlement agreement keeps the rating on ASPI at speculative-grade. If a settlement agreement is finalized, we expect the risk of a concession termination to be removed, which would meaningfully decrease credit risks for ASPI. That said, whether we raise our rating on ASPI to investment-grade will depend on various factors, including our view of its concession framework, the extent to which ASPI remains exposed to legacy risk from the collapse of Genoa bridge, and the strength of ASPI's credit metrics.

Unilateral changes introduced by article 35 of Law Decree 162/2019 have weakened the ASPI concession compared with the original terms. We understand ASPI and the grantor will sign an addendum to the original concession, as part of the settlement, which would include a mutual interpretation of such changes. Nevertheless, the expected move to a RAB model would be credit positive. In June 2019, the Italian Transport Regulation Authority (Autorità di Regolazione dei Trasporti, ART) launched a transition to a RAB scheme. This could offer ASPI more protection than its French and Spanish peers, particularly in case of downside scenarios (such as traffic decline). Under such regime, the level of tolls will be set at levels that generate a predefined return on investments and eligible costs, net of certain productivity and efficiency targets (13.87% return on ASPI existing assets and 7.09% weighted average cost of capital on future capex, the latter to be updated every five years).

Moving to a RAB system would make the Italian framework more homogeneous--some toll road operators (other than ASPI) already have concessions based on RAB mechanisms and will receive the same remuneration over future investments. The actual implementation of such a mechanism would be critical to determining its overall impact on credit quality.

Legacy risk remains difficult to quantify, although certain caps may apply under the envisaged transaction. Depending on the final terms of the ASPI disposal and the settlement agreement with the grantor, for a time we may reflect the risk that ASPI may incur future liabilities as a result of the ongoing criminal and administrative investigations of the bridge collapse.

For now, we add the provisions reported by ASPI with regard to the settlement (€1.7 billion at end-2020, largely related to future reduced tolls) into our adjusted debt because we consider them as akin to litigation. Under the current offer from CDP, ASPI would bear 25% of the legacy liabilities in excess of €150 million and Atlantia would bear the remaining 75% (capped at €459 million for Atlantia).

The criminal and administrative investigations into the collapse of Genoa bridge are still ongoing and may not conclude in the near term. Under Italian law, company directors can face personal liability in case of criminal misconduct. This may result in liabilities for the company if it is demonstrated that the processes and procedures in place were insufficient to prevent such misconduct. The amount of any fine may be net of remediation actions ASPI has already put in place, such as the reconstruction of the bridge and the increased maintenance of its network.

Under civil law, liabilities may also be levied for direct and indirect damages from the collapse of the bridge and these remain more difficult to predict.

We estimate that extensive capex and maintenance plans could reduce ASPI's funds from operations to debt to 10%-12% in 2021-2023, from 19% in 2019. We expect the level of ASPI's credit metrics to be commensurate with the sector, but weaker than French peers.

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In our latest forecasts for ASPI, we have assumed:

• A settlement amount of €3.4 billion, equal to the latest figure proposed to the grantor. The PEF submitted by ASPI included reduced tolls (cumulatively, a reduction of €1.5 billion over the life of the concession); nonremunerated capex (€1.2 billion split across 2020-2024); and expenses related to the reconstruction of the Genoa bridge (€700 million).
• We add provisions with regard to the settlement (€1.7 billion at end-2020, largely related to future reduced tolls) to our adjusted debt because we consider them as akin to litigation. We reduce them over time to reflect expected use of provisions. We could revise the amount depending on the final terms of the ASPI disposal and the settlement agreement.
• Traffic on the ASPI network to remain about 15% below 2019 levels in 2021 and largely recover to pre-pandemic levels in 2022. Traffic recovery on the ASPI network is still constrained by restrictions on movement, but we expect it to be stronger than in 2020. We anticipate a substantial recovery in the second half of 2021, on the back of more widespread vaccination.
• 1.64% annual tariff increase as per the PEF submitted for approval.

In addition, we assumed that ASPI's capex will be as described in the PEF submitted to the grantor.

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We usually assess companies' credit metrics based on the weighted-average forecast for the next two-to-three years. ASPI's plan for extensive capex may cause us to incorporate a longer timeframe, if we consider that its short-term metrics are not representative of future credit quality.

The change of control at ASPI could affect the rating, depending on its future ownership. If we assess that, in practice, CDP controls the company, we may consider ASPI to be a government-related entity. This is the case for other Italian companies that we rate, such as ENI, Terna, and SNAM.

Until the level of control that CDP will have over ASPI is clear, it is premature to comment on the level of extraordinary support that the government may provide to ASPI in case of need. That said, we see a moderate likelihood of extraordinary support for ENI, Terna, and SNAM; this does not result in any uplift to the rating because our stand-alone credit profiles for these entities are higher than our sovereign rating on Italy.

Although we do not anticipate it at this stage, if another bidder, such as an industrial group, were to acquire ASPI, we would assess the strategic importance of ASPI within the group and any potential support or constraint from the credit quality of the group.

How would we rate Atlantia after it disposes of ASPI?

Atlantia's future creditworthiness will primarily depend on its future strategy and on the strength of its credit metrics, as well as any potential legacy liabilities related to ASPI.

We expect the inflow from ASPI disposal to be higher than the current external debt held by Atlantia. The binding offer by the CDP-led consortium reflects an equity value of €9.1 billion for ASPI, excluding indemnities and earn-out mechanisms.

This corresponds to about €8 billion for Atlantia (corresponding to its 88% stake on ASPI) and is well above the €3.75 billion in external debt currently held at the holding company level (pro forma figures as of March 31, 2021). Hence, some of the proceeds may be used to pursue new investment opportunities, although at this stage Atlantia has not indicated its specific targets or strategy.

Despite the expected reduction in leverage at the holding company level, we anticipate the large external debt within the Abertis group (reported to be about €29.1 billion, as of Dec. 31, 2020) will weigh on Atlantia's metrics after the ASPI disposal. Under the current CDP-led offer, Atlantia may receive an additional payment of up to €264 million if the grantor pays compensation for the pandemic-related drop in traffic. It would also be entitled to receive any proceeds paid by insurers to ASPI.

When it disposes of ASPI, Atlantia will lose a strategic asset that represents 52% of the total Italian motorway network, and its key source of cash flow generation. Abertis will become the largest source of dividends and we estimate its contribution to EBITDA in Atlantia's consolidated accounts will increase to about 70%-75%, from 50% in 2019. At the same time, AdR will marginally increase its contribution to about 10% from 8%, based on 2019 figures.

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We will decide how to approach assessing Atlantia's credit risk after the ASPI disposal based on asset rotation, new potential investments, and the group's governance. As a holding company, our view of Atlantia's credit quality chiefly depends on the creditworthiness of the assets within its portfolio. It also depends on its access to their cash flow generation and the strategic importance of its subsidiaries, which could lead, for example, to support in case of need.

At this stage, we still consider that Atlantia's business is focused on transportation infrastructure. Depending on the future portfolio and governance of the group, we may change our rating approach, including using alternative consolidation methods (for example, proportionate or equity consolidation) if we think that consolidated reported figures do not represent Atlantia's credit risk.

A settlement agreement on ASPI would remove the liquidity risk that weighs on the current rating. As the developing outlook indicates, we could raise the rating on Atlantia if the risk of a potential termination of the ASPI concession is lifted. The future rating on Atlantia could reflect any legacy risk from the Genoa bridge collapse, depending on the extent of the liabilities Atlantia retains once the ASPI disposal and the settlement agreement with the grantor have been finalized.

Under the current offer, Atlantia would bear all pending or future claims for damages and fines from criminal and civil proceedings up to €150 million. ASPI would bear 25% of liabilities over this amount and Atlantia would bear 75% (with a €459 million cap for Atlantia). Atlantia would also be solely liable for environmental damages payable to the Ministry of Environment, up to €412 million.

How could a rating action on Atlantia affect our ratings on its subsidiaries Abertis and AdR?

We do not link our ratings on Abertis to those on its controlling parent Atlantia. Therefore, a rating action on Atlantia is unlikely to affect our 'BBB-' rating on Abertis. The negative outlook on Spain-based toll road operator Abertis is based on its tight credit metrics, which mainly reflect its debt-funded acquisitions, large dividend distributions, and exposure to traffic risk. We could revise our approach, or our assessment of Abertis' importance to the Atlantia group, if Abertis' shareholders (Atlantia and ACS) change their strategy.

By contrast, a rating action on Atlantia would most likely trigger a similar action on AdR. Our 'BB+' rating on AdR is two notches above that on its parent company. This signifies that AdR's own concession agreements with the grantor include regulatory oversight, although AdR is not exposed to any cross-defaults or guarantees from Atlantia. Hence, under our current approach, we would rate AdR at the lower of its stand-alone credit profile ('a-') and our future long-term rating on Atlantia plus two notches.

Related Research

• Atlantia 'BB-/B' Ratings Affirmed; Proposed Issuance Rated 'BB-'; Outlook Remains Developing, Feb. 11, 2021
• Atlantia And Autostrade per l'Italia 'BB-/B' Ratings Affirmed On ASPI's Debt Issuance; Outlook Developing, Dec. 4, 2020
• Atlantia, ASPI, And Aeroporti di Roma Outlooks Revised To Developing And Ratings Affirmed On Potential ASPI Settlement, Aug. 12, 2020
• Atlantia SpA And ASPI 'BB-' Ratings Remain On CreditWatch Negative On COVID-19-Related Traffic Decline, Apr. 20, 2020
• Atlantia, ASPI, AdR Continue On Watch Neg Following Milleproroghe Law; Abertis 'BBB-/A-3' Ratings Affirmed, Off Watch, March 4, 2020
• Atlantia And Subsidiaries Downgraded On Increased Concession Termination Risk For ASPI; Ratings On Watch Negative, Jan. 13, 2020