The $11 Billion Reason Italy May Not Nationalize Autostrade

(Bloomberg) -- Italy’s sovereign debt may swell by as much as 9.4 billion euros ($10.8 billion) if the government goes ahead with plans to nationalize the toll roads run by Atlantia SpA’s unit Autostrade per l’Italia SpA.

That’s the amount of net debt that Autostrade reported at the end of last year. An early termination of the company’s contract to operate about 3,000 kilometers (1,864 miles) of Italian toll roads would force the state to take over the company’s existing liabilities, according to a clause in the bond documentation.

A large bill for the government could prompt another clash with the European Union, which is already concerned about the impact the populists’ fiscal and spending plans could have on Italy’s budget.

The $11 Billion Reason Italy May Not Nationalize Autostrade

If the contract language “does hold weight, it arguably gives the Italian government an incentive not to revoke the license,” CreditSights analysts including Jassie Singh, Andrew Moulder, Mariya Nurgaziyeva wrote in a research note Monday. They were referring to both the liability risk and the possibility that the government may be stuck paying early contract-termination compensation, which would further weigh on state coffers.

Autostrade is the largest toll-road operator in Italy, controlling about half the country’s toll roads. According to its concession agreement, the government should compensate the company to terminate the contract before its expiration in 2038, but penalties and damages would offset the amount due. Autostrade’s liabilities and assets would then be transfered to the government.

Indemnities would be around 10.8 billion euros net of a fixed 10 percent penalty, analysts at Mediobanca SpA, including Nicolo Pessina, estimated in a report published on Tuesday.

Italian Deputy Premier Luigi Di Maio, leader of the anti-establishment Five Star Movement, and Transport Minister Danilo Toninelli have been threatening Atlantia with nationalization of Italian toll roads, privatized since the late 1990s, in response to the Aug. 14 bridge collapse in Genoa that killed 43 people. Di Maio’s coalition partners from the League party have been less outspoken. Cabinet Undersecretary Giancarlo Giorgetti said Monday that he “is not convinced that state management of highways would be more efficient.”

Autostrade’s board is meeting Tuesday to discuss emergency aid for the community, including a 500 million-euro fund to help victims and a promise to rebuild the bridge in less than a year. Atlantia’s board will meet Wednesday.

Political Rift

The country’s populist government is struggling to form a united front in its response to last week’s tragedy and the ensuing public anger. While Di Maio and the Five Star have been quick to criticize the private operator, Deputy Premier Matteo Salvini, whose League derives some of its support from businesses in the north, suggested EU budget rules hindered Italy’s ability to spend on transport projects.

So far, no government official has explained how the nationalization would take place and at what cost to a country that is supposed to be reducing its debt levels. Yield spreads for Italy’s sovereign debt over Germany’s touched recent highs last week, after Di Maio said the government may have to start questioning “external constraints” on spending for infrastructure.

Di Maio has downplayed concerns, saying he doesn’t see any reason to pay compensation for early termination of the concession contract if the company was negligent. Also, investors in Autostrade’s 8 billion euros of bonds could use a put option on their holdings if the concession is ended, which could reduce some of the liabilities passed on to the government. Some of the notes are guaranteed by the parent company Atlantia.

Secret Terms

The full contractual terms between the government and Autostrade, however, are secret, making it hard to gauge the chance of enforcing specific terms, the CreditSights analysts wrote.

Italian Prime Minister Giuseppe Conte stepped up pressure on Atlantia on Tuesday, telling Corriere della Sera newspaper that the initial disaster-relief offer is “certainly modest,” and that the company “could quadruple or quintuple that” to about 2.5 billion euros. The government sent a formal dispute letter dated Aug. 16 to the company starting the process of ending the concession, a plan reiterated by Di Maio on Saturday.

Atantia shares rose 3.8 percent to 19.14 euros at 12:13 p.m. in Milan on Tuesday. They traded at a four-year low after the government said it had started the process to revoke the road operator’s concession. Atlantia is valued at about 15.8 billion euros, about 25 percent less than before the bridge collapsed.

Atlantia’s 1 billion euros of bonds due in July 2027 are quoted at 88 cents on the euro, close to record low levels reached on Thursday and down from 98 cents a week ago, according to data compiled by Bloomberg. The 700 million euros of notes due September 2029 issued by Autostrade are indicated at 87 cents, the data show.

“I’d give a very low success rate to a concession revocation,” said Mario Cavaggioni, portfolio manager at Monaco-based family office Fedesa Sam, which holds Atlantia short-term bonds. “Whatever happens, the government will still be liable for Autostrade’s debt. That would make them think twice over a potential nationalization.”

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