Atlantia
ASPI May File Injunction to Freeze Potential Motorways Concession Revocation; Italian Government to Decide Tomorrow; PM Conte Says Latest ASPI Offer ‘Unsatisfactory’; Bonds Fall 3-4 Points; Updated Waterfall Available
Mon 07/13/2020 11:55 AM
Relevant Items:
Updated Waterfall Model
Atlantia’s subsidiary Autostrade per l’Italia, or ASPI, may file for an injunction with Italy’s administrative court to freeze a potential revocation of its motorways concession by the government at least until there is a final judgment, sources close to the matter told Reorg. The Italian cabinet will hold a meeting tomorrow to decide on the possible withdrawal.
ASPI sent a €3.4 billion draft settlement to the government on Saturday, which proposed a tariff reduction, more investment in the network and an increased compensation for the damage caused by the August 2018 collapse of the Morandi bridge in Genoa. The company’s previous proposal amounted to €2.9 billion in total.
As part of its proposal, Atlantia said it is also willing to reduce its stake in ASPI from the current 88.06% to 37%, either through a capital increase with a dilutive effect or due to the sale of part of its ASPI stake.
Reorg has updated the waterfall model of the potential consequences from a concession revocation. The underlying assumptions of the model can be read HERE, and the updated model can be found HERE.
Atlantia’s CDS has widened another 70-80 basis points compared with Friday and is now indicated at 395/430, while the company’s bonds across its capital structure are down about 3-4 points. The group’s shares were down about 15% this afternoon and the market cap now stands at about €9.4 billion, 54% down from August 2018, before the Genoa bridge collapse.
“Atlantia has no intention of fully exiting ASPI, has recognized its errors and now wants to have the pride and patience to make up for it, even with other partners,” Atlantia CEO Carlo Bertazzo told Italian daily La Repubblica. “Since Feb. 6, we considered the possibility of diluting our stake in favor of third-party shareholders below 51% but at market conditions and in respect of the minority shareholders Allianz and Silkroad.”
A revocation of the concession could result in a put option being triggered for about €6.4 billion of ASPI bonds, of which €3.3 billion are guaranteed by Atlantia. Additionally ASPI has about €1.8 billion other debt facilities guaranteed by Atlantia, bringing the total amount of guaranteed debt to €5.1 billion. ASPI’s total debt amounts to €9 billion, while Atlantia has a further €9 billion of debt at the holdco level.
ASPI operates about 3,000 kilometers of toll roads in Italy, about half of the country’s total, with the concession set to run until 2038.
Atlantia’s view did not resonate with Italy’s Prime Minister Giuseppe Conte. “The latest ASPI proposal is largely unsatisfactory, I’d say embarrassing. It’s everything but an unconditional acceptance of all the requests made by the government,” he told Italian daily Il Fatto Quotidiano today. “In the ASPI offer, there is no commitment to indemnify the public for all the damage claims related to the collapse of the Morandi bridge. The €3.4 billion offered as compensation has been largely attributed by ASPI to maintenance work which the concessionaire already has an obligation to carry out,” he added.
“According to the ASPI proposal, even in the event of serious impairments in the functionality of the motorway network attributable to ASPI, the state could not terminate the contract with the company but only force the concessionaire to restore the functionality of the network. With the consequence that, if another bridge collapses, we could not dissolve the agreement and, if we ever did, we would have to repay ASPI €10 billion, and only for goodwill. When I read the proposal I thought it was a joke,” Conte said.
“I can only say that, in the current state of affairs, I foresee only one decision, which was triggered by ASPI’s attitude,” Conte said.
As reported, Atlantia’s stake reduction plan was considered politically palatable by junior coalition parties in the government such as the Democratic Party and Italia Viva as the Benetton family, which owns a 30.25% stake in Atlantia, would not be compensated in cash for the sale of its stake in ASPI but would be significantly diluted. On the other hand, Italy’s ruling party Five Star Movement pledged to strip the concession from Atlantia and has promised to exclude the Benetton family from the company.
If a revocation goes ahead, the government would award the concession to state-owned operator ANAS, although there are concerns over ANAS’ capability to operate half of the country’s motorways and to address the significant investment requirements of the asset.
This decision could trigger a legal dispute between the government and Atlantia, the outcome and duration of which are uncertain. Some sources believe that the government’s negotiating hand and legal arguments have been strengthened by the July 8 Italy’s Constitutional Court decision, which held that it was legitimate for the government to exclude ASPI from the reconstruction of the Morandi bridge.
“I am not optimistic about the outcome of the situation,” the president of Edizione, the Benetton holding family, told Italian pressy agencies.
Milleproroghe Dilemma
A significant point of contention between Atlantia and the government is the Milleproroghe decree, which was approved at the end of 2019. The law decree unilaterally changed the legal framework for motorway concessionaires and established that compensation for ASPI in case of a concession revocation would be cut to between €7 billion and €10 billion from the originally envisaged €23 billion.
ASPI says the Milleproroghe decree cannot be applied retroactively and is calling for a review of its early termination clause, which says that a potential concession revocation does not require the immediate compensation of the concessionaire. The company said an indemnification should be based on the fair market value of the asset and that the effective termination needs to take place only upon payment of the indemnification. It noted the unilateral review forced by the Milleproroghe decree caused a multi-notch downgrade by rating agencies, preventing necessary access to capital markets.
Atlantia approached the European Commission with a letter requesting it take a “prompt and firm initiative” with the Italian authorities over potential breaches of EU law following the Italian government’s adoption of the Milleproroghe decree in January.
According to articles 8 and 9 of the original concession agreement, from 2007, ASPI as the concessionaire is responsible for maintenance work and that the concession can be terminated in the event of severe breaches (gravi inadempienze).
On the other hand, art. 7 of the concession agreement says that the grantor “requests information and carries out checks through its powers of inspection, access and acquisition of useful information.” The grantor is also required to monitor ordinary and extraordinary maintenance works - without diminishing the concessionaire’s responsibility regarding the execution of its obligations - and to oversee ASPI’s financial plan having access to all its documentation, according to art. 28.
There is a lack of clarity in relation to art. 9 of the concession agreement, comma 3, which defines which entities get transferred when and if the concession is withdrawn. It’s unclear whether Atlantia would still have to guarantee the ASPI bonds should they be transferred to state-owned motorways operator ANAS. Comma 3 says that assets and liabilities of the concessionaire which are related to the existing concession agreement are transferred to the concession grantor when the concession moves.
According to art. 1229 of Italy’s civil code, “any agreement that excludes or limits the debtor's liability for willful misconduct or gross negligence is void. Any agreement which limits the debtor’s responsibilities is void too if the debtor or its auxiliaries have violated obligations deriving from public order rules.”
Put Option Trigger If Concession Revoked
A revocation of the concession could result in a put option being triggered for about €6.4 billion of ASPI bonds, of which €3.3 billion are guaranteed by Atlantia. Our analysis assumes that all debt at ASPI could be accelerated if the concession is stripped, considering: (i) the put option, (ii) the events of default in the ASPI notes, (iii) the change of business clause in the retail bond, and (iv) the fact that there are no other operations or value in the business beyond the concession contract.
The cross-default provisions in the Atlantia notes explicitly exclude ASPI’s loss of concession as an event of default on its own, as long as there is no related payment default. This would allow Atlantia to isolate the impact of ASPI’s loss of concession by injecting sufficient liquidity to cover all obligations, including repayment of the ASPI notes under its put option. Were Atlantia only to directly guarantee €5.1 billion of ASPI’s €9 billion total debt, the holdco would need to cure the shortfall in ASPI in its entirety to avoid a payment default on the ASPI notes triggering a cross-default, resulting in debt acceleration of Atlantia’s €9 billion debt stack. In order to cure the debt accelerating at ASPI level, Atlantia would need to generate an additional €2.7 billion of liquidity to inject into ASPI, in addition to its existing €4.1 billion in cash and a further €1.5 billion cash across the structure.
See Reorg’s updated waterfall model HERE.
If Atlantia does not step in to cure the liquidity shortfall at ASPI, the unguaranteed debt would face a payment default, with recovery limited to those funds that are available at the ASPI level, and consequently a cross-default at holdco would take place. The amounts redeemed under the put option and accelerated under the cross-default at ASPI would be first repaid pari passu from the available liquidity within the ASPI structure. The guaranteed amounts (i.e. the EIB facility and the guaranteed notes) would then become senior unsecured debt of Atlantia, ranking pari passu with the holdco’s existing indebtedness.
Even if a payment default at ASPI is avoided, Atlantia creditors who wish to accelerate the holdco debt could rely on the change-of-business event of default in the Atlantia notes, following the loss of the concession. This provision carves out cessation of business by Atlantia or a material subsidiary (such as ASPI) resulting from the termination of a concession “in accordance with its terms.” The terms of the concession agreement, however, have now been amended unilaterally by the decree approved by the Italian government, retroactively changing items in the concession contract framework.
Atlantia holdco creditors, attempting to circumvent the above carve out, could argue that, due to this amendment, the carve-out does not apply and there is a change-of-business event of default at the Atlantia level. An acceleration notice can be issued upon instruction from at least 25% of Atlantia’s outstanding noteholders upon such a continuing event of default, resulting in Atlantia’s debt falling immediately due and payable.
Whether or not Atlantia creditors choose to call the event of default under this clause will depend on the potential recovery at the time of revocation, taking into account both the group’s liquidity requirements and creditors’ view on the remaining Atlantia group and the value in its portfolio.
Atlantia’s creditors can expect a full recovery if the current Atlantia portfolio, excluding ASPI, exceeds €10.9 billion based on Reorg’s calculations, but any downward pressure on valuations at sale due to urgency would bring this threshold up. The greater the liquidity stress facing the group, the more pressure on valuations could be intensified - something both the creditors and the company likely want to avoid.
Atlantia group debt structure as of March 31 is below:
-- Luca Rossi, Karoliina Hienonen
Updated Waterfall Model
Atlantia’s subsidiary Autostrade per l’Italia, or ASPI, may file for an injunction with Italy’s administrative court to freeze a potential revocation of its motorways concession by the government at least until there is a final judgment, sources close to the matter told Reorg. The Italian cabinet will hold a meeting tomorrow to decide on the possible withdrawal.
ASPI sent a €3.4 billion draft settlement to the government on Saturday, which proposed a tariff reduction, more investment in the network and an increased compensation for the damage caused by the August 2018 collapse of the Morandi bridge in Genoa. The company’s previous proposal amounted to €2.9 billion in total.
As part of its proposal, Atlantia said it is also willing to reduce its stake in ASPI from the current 88.06% to 37%, either through a capital increase with a dilutive effect or due to the sale of part of its ASPI stake.
Reorg has updated the waterfall model of the potential consequences from a concession revocation. The underlying assumptions of the model can be read HERE, and the updated model can be found HERE.
Atlantia’s CDS has widened another 70-80 basis points compared with Friday and is now indicated at 395/430, while the company’s bonds across its capital structure are down about 3-4 points. The group’s shares were down about 15% this afternoon and the market cap now stands at about €9.4 billion, 54% down from August 2018, before the Genoa bridge collapse.
“Atlantia has no intention of fully exiting ASPI, has recognized its errors and now wants to have the pride and patience to make up for it, even with other partners,” Atlantia CEO Carlo Bertazzo told Italian daily La Repubblica. “Since Feb. 6, we considered the possibility of diluting our stake in favor of third-party shareholders below 51% but at market conditions and in respect of the minority shareholders Allianz and Silkroad.”
A revocation of the concession could result in a put option being triggered for about €6.4 billion of ASPI bonds, of which €3.3 billion are guaranteed by Atlantia. Additionally ASPI has about €1.8 billion other debt facilities guaranteed by Atlantia, bringing the total amount of guaranteed debt to €5.1 billion. ASPI’s total debt amounts to €9 billion, while Atlantia has a further €9 billion of debt at the holdco level.
ASPI operates about 3,000 kilometers of toll roads in Italy, about half of the country’s total, with the concession set to run until 2038.
Atlantia’s view did not resonate with Italy’s Prime Minister Giuseppe Conte. “The latest ASPI proposal is largely unsatisfactory, I’d say embarrassing. It’s everything but an unconditional acceptance of all the requests made by the government,” he told Italian daily Il Fatto Quotidiano today. “In the ASPI offer, there is no commitment to indemnify the public for all the damage claims related to the collapse of the Morandi bridge. The €3.4 billion offered as compensation has been largely attributed by ASPI to maintenance work which the concessionaire already has an obligation to carry out,” he added.
“According to the ASPI proposal, even in the event of serious impairments in the functionality of the motorway network attributable to ASPI, the state could not terminate the contract with the company but only force the concessionaire to restore the functionality of the network. With the consequence that, if another bridge collapses, we could not dissolve the agreement and, if we ever did, we would have to repay ASPI €10 billion, and only for goodwill. When I read the proposal I thought it was a joke,” Conte said.
“I can only say that, in the current state of affairs, I foresee only one decision, which was triggered by ASPI’s attitude,” Conte said.
As reported, Atlantia’s stake reduction plan was considered politically palatable by junior coalition parties in the government such as the Democratic Party and Italia Viva as the Benetton family, which owns a 30.25% stake in Atlantia, would not be compensated in cash for the sale of its stake in ASPI but would be significantly diluted. On the other hand, Italy’s ruling party Five Star Movement pledged to strip the concession from Atlantia and has promised to exclude the Benetton family from the company.
If a revocation goes ahead, the government would award the concession to state-owned operator ANAS, although there are concerns over ANAS’ capability to operate half of the country’s motorways and to address the significant investment requirements of the asset.
This decision could trigger a legal dispute between the government and Atlantia, the outcome and duration of which are uncertain. Some sources believe that the government’s negotiating hand and legal arguments have been strengthened by the July 8 Italy’s Constitutional Court decision, which held that it was legitimate for the government to exclude ASPI from the reconstruction of the Morandi bridge.
“I am not optimistic about the outcome of the situation,” the president of Edizione, the Benetton holding family, told Italian pressy agencies.
Milleproroghe Dilemma
A significant point of contention between Atlantia and the government is the Milleproroghe decree, which was approved at the end of 2019. The law decree unilaterally changed the legal framework for motorway concessionaires and established that compensation for ASPI in case of a concession revocation would be cut to between €7 billion and €10 billion from the originally envisaged €23 billion.
ASPI says the Milleproroghe decree cannot be applied retroactively and is calling for a review of its early termination clause, which says that a potential concession revocation does not require the immediate compensation of the concessionaire. The company said an indemnification should be based on the fair market value of the asset and that the effective termination needs to take place only upon payment of the indemnification. It noted the unilateral review forced by the Milleproroghe decree caused a multi-notch downgrade by rating agencies, preventing necessary access to capital markets.
Atlantia approached the European Commission with a letter requesting it take a “prompt and firm initiative” with the Italian authorities over potential breaches of EU law following the Italian government’s adoption of the Milleproroghe decree in January.
According to articles 8 and 9 of the original concession agreement, from 2007, ASPI as the concessionaire is responsible for maintenance work and that the concession can be terminated in the event of severe breaches (gravi inadempienze).
On the other hand, art. 7 of the concession agreement says that the grantor “requests information and carries out checks through its powers of inspection, access and acquisition of useful information.” The grantor is also required to monitor ordinary and extraordinary maintenance works - without diminishing the concessionaire’s responsibility regarding the execution of its obligations - and to oversee ASPI’s financial plan having access to all its documentation, according to art. 28.
There is a lack of clarity in relation to art. 9 of the concession agreement, comma 3, which defines which entities get transferred when and if the concession is withdrawn. It’s unclear whether Atlantia would still have to guarantee the ASPI bonds should they be transferred to state-owned motorways operator ANAS. Comma 3 says that assets and liabilities of the concessionaire which are related to the existing concession agreement are transferred to the concession grantor when the concession moves.
According to art. 1229 of Italy’s civil code, “any agreement that excludes or limits the debtor's liability for willful misconduct or gross negligence is void. Any agreement which limits the debtor’s responsibilities is void too if the debtor or its auxiliaries have violated obligations deriving from public order rules.”
Put Option Trigger If Concession Revoked
A revocation of the concession could result in a put option being triggered for about €6.4 billion of ASPI bonds, of which €3.3 billion are guaranteed by Atlantia. Our analysis assumes that all debt at ASPI could be accelerated if the concession is stripped, considering: (i) the put option, (ii) the events of default in the ASPI notes, (iii) the change of business clause in the retail bond, and (iv) the fact that there are no other operations or value in the business beyond the concession contract.
The cross-default provisions in the Atlantia notes explicitly exclude ASPI’s loss of concession as an event of default on its own, as long as there is no related payment default. This would allow Atlantia to isolate the impact of ASPI’s loss of concession by injecting sufficient liquidity to cover all obligations, including repayment of the ASPI notes under its put option. Were Atlantia only to directly guarantee €5.1 billion of ASPI’s €9 billion total debt, the holdco would need to cure the shortfall in ASPI in its entirety to avoid a payment default on the ASPI notes triggering a cross-default, resulting in debt acceleration of Atlantia’s €9 billion debt stack. In order to cure the debt accelerating at ASPI level, Atlantia would need to generate an additional €2.7 billion of liquidity to inject into ASPI, in addition to its existing €4.1 billion in cash and a further €1.5 billion cash across the structure.
See Reorg’s updated waterfall model HERE.
If Atlantia does not step in to cure the liquidity shortfall at ASPI, the unguaranteed debt would face a payment default, with recovery limited to those funds that are available at the ASPI level, and consequently a cross-default at holdco would take place. The amounts redeemed under the put option and accelerated under the cross-default at ASPI would be first repaid pari passu from the available liquidity within the ASPI structure. The guaranteed amounts (i.e. the EIB facility and the guaranteed notes) would then become senior unsecured debt of Atlantia, ranking pari passu with the holdco’s existing indebtedness.
Even if a payment default at ASPI is avoided, Atlantia creditors who wish to accelerate the holdco debt could rely on the change-of-business event of default in the Atlantia notes, following the loss of the concession. This provision carves out cessation of business by Atlantia or a material subsidiary (such as ASPI) resulting from the termination of a concession “in accordance with its terms.” The terms of the concession agreement, however, have now been amended unilaterally by the decree approved by the Italian government, retroactively changing items in the concession contract framework.
Atlantia holdco creditors, attempting to circumvent the above carve out, could argue that, due to this amendment, the carve-out does not apply and there is a change-of-business event of default at the Atlantia level. An acceleration notice can be issued upon instruction from at least 25% of Atlantia’s outstanding noteholders upon such a continuing event of default, resulting in Atlantia’s debt falling immediately due and payable.
Whether or not Atlantia creditors choose to call the event of default under this clause will depend on the potential recovery at the time of revocation, taking into account both the group’s liquidity requirements and creditors’ view on the remaining Atlantia group and the value in its portfolio.
Atlantia’s creditors can expect a full recovery if the current Atlantia portfolio, excluding ASPI, exceeds €10.9 billion based on Reorg’s calculations, but any downward pressure on valuations at sale due to urgency would bring this threshold up. The greater the liquidity stress facing the group, the more pressure on valuations could be intensified - something both the creditors and the company likely want to avoid.
Atlantia group debt structure as of March 31 is below:
-- Luca Rossi, Karoliina Hienonen
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