July 02 - Fitch Ratings explains in a series of recently-published reports that the prolonged economic weakness in European economies is eroding the core stability of the infrastructure sector. The medium term prospects for specific infrastructure assets vary significantly and are determined by a combination of the economic and political dynamics of the host country and the relative importance of the asset’s role.
The prospects for two types of infrastructure asset in particular have weakened since Fitch published its EMEA infrastructure outlooks in December 2011. Firstly, the Outlook for large mature transportation networks in southern Europe is revised to Negative (from Stable). Until recently these assets had experienced reasonable traffic resilience considering the severity of the economic downturn. However, the second wave of traffic declines, reflecting the current double-dip recession, is now affecting even these stronger players.
Secondly, the Outlook for European renewable energy projects is revised to Stable / Negative (from Stable). Fitch continues to expect that European governments will not apply retroactive cuts to the frameworks incentivising renewable energy projects. However, the increased pressures on public and private budgets in a number of European countries could result in some governments enacting short-term measures to provide temporary relief from the liquidity issues created by onerous incentives.
Overall, Fitch has a Negative Outlook on assets which are exposed to weak underlying economic demand without having the market position to support volumes. Examples would include transportation assets which perform a secondary role in the sector, those located in southern European countries or those exposed to significant near term refinancing risk. The UK pub sector would also fall into this category although Fitch has observed a divergence in performance between tenanted and managed estates. Finally, the thermal power sector is experiencing very tight margins due to a combination of weak power demand growth coupled with high gas prices.
A further driver for Negative Outlooks is the deteriorating finances of many public sector counterparties. This is relevant for the UK care home sector, which relies significantly on public sector referrals without the benefit of long term contracts and which is facing downward pricing pressure. It is also a risk for transportation or social infrastructure projects with revenue streams based on availability payments from the public sector. Fitch has already observed revenue payment delays in some Spanish road projects. The payment record of grantors on UK social infrastructure projects has remained strong so far. A further consequence of public sector financial stress is an increase in the risk that regulatory frameworks for infrastructure may be renegotiated or otherwise altered. This is particularly a risk for solar power projects which are increasingly perceived as expensive luxuries.
Finally, the need to refinance looming debt maturities for highly leveraged regional airports and care home operators presents significant risk. This situation is amplified, particularly for companies traditionally reliant on bank debt, by the reduced appetite of European banks to provide long term debt capital.
Rating outlooks for some companies affected by these factors may still be stable in cases where either the companies retain sufficient financial flexibility or where Fitch considers that it has already taken sufficient rating action to accommodate foreseeable stress.
Fitch maintains Stable Outlooks on a variety of asset classes: Large hub airports, mature toll-road networks, diversified seaports and essential rail links in economies where downturn has been milder are still showing resilient performance; liquefied natural gas and oil producers are benefiting from continued strong oil prices, albeit lower than the peaks of 2011; the medium term profitability of many thermal power plants should be supported by the need for substantial investment to meet government environmental targets and to replace ageing plants; and finally, the operating and financial performance of UK social infrastructure projects as well as the payment record of the public sector grantors there has been good.
Fitch’s EMEA rating outlooks for infrastructure sectors are as follows:
EMEA Transportation (Stable / Negative)
EMEA Energy (Stable / Negative)
UK Social Infrastructure (Stable)
UK Whole Business Healthcare (Negative)
UK Whole Business Pubs (Stable / Negative)
The published reports can be found at www.fitchratings.com.