Italian multi-utility Hera SpA (BBB/Positive/A-2) and Ascopiave SpA does not deter Hera from strengthening its credit metrics, notably funds from operations (FFO) to debt, over the coming two years
S&P Global Ratings today said that, at this time, the announced asset swap between Italian multi-utility Hera SpA (BBB/Positive/A-2) and Ascopiave SpA does not deter Hera from strengthening its credit metrics, notably funds from operations (FFO) to debt, over the coming two years. We continue to assume that Hera will maintain sound financial performance while deploying its investment plan and generating healthy cash flow after capital expenditure and dividends.
On July 30, 2019, Hera announced its binding offer for Ascopiave's gas and power clients (EBITDA of about €60 million-€80 million) in exchange for 188,000 gas distribution delivery points in northeast Italy. The transaction will be executed through the joint venture EstEnergy, of which Hera will acquire 52%. We understand these numbers are preliminary and subject to ongoing negotiations. We expect the transaction to be completed before the end of the year.
This asset swap will not result in any cash outflow. However, the transaction leaves Hera with a €466 million put option on the remaining shares in EstEnergy. The option can be exercised wholly or in part each year over seven years.
In our view, the transaction has a marginally negative effect on Hera's business risk position, as the group will lose about 4% of its fully regulated EBITDA coming from gas distribution activities in Italy. We will monitor the likelihood of the put option being exercised every year and reassess Hera's creditworthiness accordingly, taking into account the group's updated business plan, which we expect to be published at the beginning of 2020. We understand that the put option might be exercised once the gas distribution re-tendering concession process accelerates in northeast Italy, which we expect to occur in 2020-2021 and over the following years. If this were to occur, the immediate impact would be a weakening of Hera's credit ratios, before improving gradually over the following two years.
The positive outlook on Hera indicates the possibility of an upgrade in the next 12-18 months should its S&P Global Ratings-adjusted FFO to debt (including income from clients) remain above 23% over our forecast, which would hinge on management's commitment to achieving this metric. As per our approach to rating utilities with assets only exposed to one geography, Hera can be rated one notch above the sovereign credit rating on Italy (unsolicited BBB/Negative/A-2).
