Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations.

Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit ratings’ performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for Terna - Rete Elettrica Nazionale SpA (Terna) (A-/Stable issuer rating; A- rating for senior unsecured debt; S-1 short-term debt rating) on 19 November 2021.

This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action connected with this monitoring note along with the associated rating history can be found on www.scoperatings.com.

Key rating factors

Terna’s A-/Stable issuer rating continues to reflect limited business risk due to its monopolistic position in Italy under a robust regulatory framework, which guarantees timely and full cost recovery as well as robust operating cash flow, as demonstrated by the grid operator’s sustained margin profile above 70% (EBITDA margin). Scope believes Terna can perform robustly even under challenging macro-economic conditions, thanks to the framework for revenue recognition under the regulatory framework. This view has not changed despite potential adjustments to the tariff setting framework.

The weighted average cost of capital applicable to Terna’s regulated asset base for the years 2022 and 2023 is expected to decrease from the current 5.6%, mainly driven by a lower level for the cost of debt (to be announced by the regulator ARERA in December 2021). However, Scope expects the effect on EBITDA and operating cash flow to be balanced by a growing asset base among other things. Overall, Scope does not expect any drastic changes in the credit-supportive regulatory framework which could threaten a sustained EBITDA margin of around 70%.

Terna’s rating remains constrained by its moderate gearing, which is constantly pressured by growing capex needs under the EUR 8.9bn medium-term ‘Strategic Investment Plan’ for 2021-2025 (likely to be updated in Q1 2022) and the long-term 10-year investment plan of EUR 18.1bn. The grid operator’s free operating and discretionary cash flow are likely to remain negative for the next few years. Consequently, headroom on leverage – measured by Scope-adjusted debt/EBITDA – which Scope expects within a range of 5-6x, is gradually shrinking. However, Scope understands that Terna is fully committed to implementing adequate measures that strengthen its balance sheet if leverage is at risk of deteriorating to a level that would compromise its credit profile. Based on Scope’s EBITDA forecasts for 2021-23E, Terna’s debt headroom against a potential negative rating action (triggered if Scope-adjusted debt/EBITDA exceeds 6x) would shrink from EUR 1.6bn in 2021 to around EUR 300m in 2023.

Despite the rising pressure on leverage from prolonged negative discretionary cash flows, debt protection and liquidity are expected to remain very solid. Debt protection – measured by the EBITDA interest coverage ratio – remains well above 10x. Scope expects liquidity over the next few years to stand above 200% at all times, backed by the solid unrestricted cash buffer of more than EUR 2.5bn as of September 2021, available committed revolving credit facilities of EUR 2.65bn and operating cash flow expected to exceed EUR 1bn annually.

Scope’s rating continues to be detached from a mechanistic rating cap related to the sovereign rating of the Italian Republic (rated BBB+/Stable by Scope). Although it is exposed to regulations and subject to significant public scrutiny, Scope believes regulated grid operators are only affected to a limited extent by a mature and investment grade-rated country’s state finances and macroeconomic conditions.

This publication does not constitute a credit rating action. Scope affirmed its ratings on Terna SpA on 23 November 2020. For the official credit rating action release click here.

The methodologies applicable for the reviewed rating and/or rating Outlook (Corporate Rating Methodology, 6 July 2021; European Utilities Rating Methodology, 18 March 2021) are available on https://www.scoperatings.com/#!methodology/list.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Sebastian Zank, Executive Director

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