Fitch Ratings has assigned CDP RETI SpA's EUR500 million senior unsecured fixed rate 5.875% notes due 25 October 2027 a 'BBB' rating.
The notes' proceeds will be used to refinance the bridge loan agreements, which will remain outstanding for the residual EUR250 million, with a maturity at May 2023, and a six-month additional extension option at the borrower's discretion.
The senior unsecured rating is aligned with the issuer's affirmed 'BBB'/Stable Long-Term Issuer Default Rating (LT IDR), being pari passu with all the other financial obligations.
The rating primarily reflects CDP RETI's standalone credit profile (SCP) of 'bbb', which continues to display a low and resilient loan-to-value (LTV) ratio, sound interest coverage and limited refinancing risk. These strengths are partially offset by a structurally weak liquidity profile, with no back-up credit lines and limited diversification of assets. Solid leverage metrics are underpinned by regulated and cash-generative operating assets with limited exposure to volume and price risks. This results in high visibility over dividends through to 2023, notwithstanding the ongoing geopolitical and macroeconomic-related uncertainties.
Key Rating Drivers
Holding Company Features: CDP RETI is a long-term holder of strategic equity stakes in Snam S.p.A. (BBB+/Stable; about 31%) and Terna S.p.A. (about 30%) - the two transmission system operators (TSOs) of the Italian gas and electricity systems, respectively - and in Italgas S.p.A. (BBB+/Stable; about 26%), a leading gas distribution operator (DSO). Fitch does not expect other relevant investments. CDP RETI appoints six of nine board directors for Snam and Italgas and six out of 13 for Terna. It retains strong control over the companies' dividend policies.
In assessing CDP RETI's SCP, we considered the drivers of our Investment Holding Companies Rating Criteria for investment holding companies as well as pro forma, proportionately consolidated metrics, which confirm the 'bbb' SCP assessment.
'bbb' BISA: The dividend-weighted average credit quality of CDP RETI maps to a 'bbb' blended income stream assessment (BISA) rating. This is one notch lower than the 'bbb+' average quality of the cash flow arising from the company's holdings, due to structural subordination of the dividends. We expect Snam to contribute about 54%, Terna 35% and Italgas 11% to CDP RETI's underlying dividends until 2023.
Low Asset Diversification: CDP RETI has a more concentrated and stable approach towards its portfolio compared with the average investment-holding company, in line with its key strategic role. All three companies share a similar sector, country and regulator as well as similarities within their regulatory frameworks. This limits any explicit notching uplift for diversification of the 'bbb' BISR under our criteria.
Neutral Supplementary Factors: CDP RETI's SCP benefits from strong double-digit dividend coverage and a conservative LTV ratio of about 20%, after applying a haircut based on our methodology. Such strong supplementary factors are counterbalanced by debt maturities that are structurally reliant on external refinancing. The medium-term gross debt/dividend ratio is commensurate with the current 'bbb' SCP category, and we forecast it to progressively decline to 3.1x in 2023 from 3.5x currently, on expected rising dividends and stable indebtedness.
Regulatory Visibility: CDP RETI's holdings operate within a highly transparent regulatory regime with a long record and minimal exposure to price and volume risk. Italgas, Terna and Snam are in their fifth regulatory periods that span until 2023 (for TSOs) and 2025 (for DSOs and gas storage), with the no material downsides stemming from current energy crisis and high inflationary interest-rate environment.
Parent and Subsidiary Rating Relationship: Based on Fitch's Parent and Subsidiary Linkage Rating Criteria, should CDP RETI's SCP become stronger than the parent's rating, the company could be rated up to two notches above the parent, due to 'porous' legal ringfencing and access and control. In the case of CDP RETI's SCP becoming weaker than CDP's rating, we would expect an equalisation of the ratings of the two companies (a benefit for CDP RETI), reflecting the 'medium' level of legal and strategic incentive to support in combination with the 'high' operational incentive to support.
Derivation Summary
CDP RETI does not have close peers. However, it has some similarities with Criteria Caixa, S.A., Unipersonal (BBB+/Stable) and, to a lesser extent, with the parent of regulated companies like National Grid Plc (BBB-/Stable), Kemble Water Finance Limited (B+/Negative) and Osprey Acquisitions Limited (BB+/Stable).
CDP RETI is smaller in terms of dividends received and is less diversified than Criteria Caixa, but benefits from the more stable performance of its assets. This is highlighted by its investments in Italgas, Terna and Snam, which all operate in the same country and sector and share the same regulator, whereas Criteria Caixa has investments across different sectors but primarily in Spain. CDP RETI benefits from better access to dividends than UK holding companies (ie no lock-up or other restrictions on dividends distributions from underlying companies), which reduces the rating differential between holding and operating companies.
Key Assumptions
Fitch's Key Assumptions within our Rating Case for the Issuer:
Dividends received gradually increasing to over EU540 million by 2023
Low operating expenses of about EUR2 million a year up to 2023
No financial investments over the next three years
Dividends distribution modelled to enable almost neutral FCF and broadly stable
Cash on balance sheet of about EUR75 million-95 million
Gross debt remaining at about EUR1.7 billion over the next three years
Cost of new debt at about 6%
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A positive rating action or an upgrade of CDP's IDR would result in a similar action on CDP RETI's IDR
An upgrade of CDP RETI's SCP would be positive for its IDR, though we deem such an upgrade as unlikely given the company's dividend policy and the ratings of the underlying assets
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade of the operating companies' IDRs could be negative for CDP RETI's SCP, though not for its IDR, assuming that the links with the parent, CDP, remain unchanged
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
Sustainable Liquidity: CDP RETI's liquidity is structurally weak for an investment-grade holding/parent company, as it relies entirely on external market/parent refinancing at maturity. Also, the company does not usually refinance most of its maturities in advance.
However, we view the current refinancing risk - EUR250 million bridge financing maturing in May 2023 - as manageable due to its sound financial profile, performing operating assets and established relationship with capital and banking markets as shown in the recent refinancing exercise. Furthermore, we expect CDP to remain committed to supporting the refinancing at market rates, in case of need.
At end-2021, CDP RETI had readily available cash of about EUR92 million, but no committed revolving credit facilities. The company has structurally neutral FCF, since under its bylaws almost all dividends received from its investments are distributed to shareholders.
Issuer Profile
CDP RETI operates as an investment vehicle that support the development of strategic infrastructure in Italy's gas and electricity sectors. The company has stakes in Italgas, a gas DSO, as well as Snam and Terna, Italian TSOs. CDP RETI is owned by CDP, which has a 59% stake, alongside State Grid Europe Limited (SGEL; 35%) and local institutional investors (6%).
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
ITALGAS S.P.A. 
