Rating action

Scope Ratings has today assigned a first-time issuer rating of A-/Stable/S-1 to Terna - Rete Elettrica Nazionale S.p.A. (Terna SpA). Senior unsecured debt issued by Terna SpA is rated A-.

The latest information on the rating, including rating reports and related methodologies are available on this LINK.

Rating rationale

The issuer rating reflects our view of the company’s limited business risk due to its monopolistic position in Italy under a robust regulatory framework, which guarantees timely cost recovery and robust operating cash flow. However, this is offset by structural aspects of the company’s core service territory, the Italian Republic (rated BBB+/Stable by Scope). The rating is also constrained by the financial risk profile, which is characterised by high indebtedness and strong capex requirements over the next few years.

The rating is driven positively by the following:

• Strong business risk profile characterised by:
  
  - Protected monopolistic position in Italy
  
  - Over 90% of revenues protected by a reliable regulatory framework until 2023, resulting in the strong stability and visibility of cash flows
  
  - Large virtual outreach to more than 60m customers
  
  - Very high profitability (recurring EBITDA margin of above 70%) related to a favourable tariff-setting environment and large share of regulated asset base (RAB) remuneration
  
  - Full cost coverage backed by reliable regulatory framework in Italy until 2023
   
• High leverage partly offset by sustainably strong interest coverage and robust liquidity
   
• Strong access to capital funding and extensive implementation of ESG

However, the following aspects limit the rating:

• Persistent weaknesses in financial risk profile including a Scope-adjusted leverage of around 5x
   
• Growing pressure on FOCF generation going forward from enlarged investment programme
   
• Structural aspects of the service territory in the Italian Republic (BBB+/Stable by Scope)

Instrument ratings

All senior unsecured debt issued is rated at the level of the issuer at A-.

Outlook and rating-change drivers

The Stable Outlook reflects our expectation that Terna’s indebtedness will remain high, owing to rising capex needs over the mid-term as indicated by the updated strategic plan. In this regard, we estimate a Scope-adjusted leverage (SaD/EBITDA) sustained at around 5x in the next few years.

A positive rating action rating could be warranted if the company strengthened its balance sheet, e.g. by a SaD/EBITDA moving towards 4x on a sustainable basis. Given the large investment programme and low free operating and discretionary cash flows over the next few years, such a rating upgrade is not likely for the time being.

A negative rating action could result from a deterioration of the financial risk profile from SaD/EBITDA rising towards 6x, which is also deemed as unlikely. This could be due to a prolonged period of negative free operating and discretionary cash flows or a drastic, adverse change in the Italian tariff regulation which jeopardises Terna’s high margins and timely recovery of costs.

Stress testing & cash flow analysis
No stress testing was performed. Scope performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for this rating(s) and/or rating outlook(s) (Corporate Rating Methodology; Rating Methodology on European Utilities) are available on www.scoperatings.com.
Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definition of default as well as definitions of rating notations can be found in Scope’s public credit rating methodologies on www.scoperatings.com.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The rated entity participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, third parties and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst Sebastian Zank, Executive Director
Person responsible for approval of the rating: Olaf Tölke, Managing Director
The ratings/outlooks were first released by Scope on 17.05.2019.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
© 2019 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstraße 5 D-10785 Berlin.

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