On April 13, eight banks signed a commitment letter with Gemina, the holding company for Aeroporti di Roma (AdR), to refinance Eu600 million ($795 million) of existing debt at the operating company level. The commitment letter includes a binding term sheet, so banks are now in the process of tying up all the necessary documentation, with the aim of closing the refinancing by the end of June.

The agreement is an important milestone, since the existing refinancing risk had created downward pressure on AdR’s credit rating in recent months. Gemina, the majority shareholder in AdR, will be hoping that the refinancing alleviates this pressure and allow for easier capital markets access, which has been a cornerstone of AdR’s financing structure since a refinancing in 2003.

AdR owns a concession to exclusively operate both of Rome’s main airports, Fiumicino-Leonardo da Vinci and Ciampino, until 2044. Gemina’s interest in AdR dates back to June 2000, when IRI, the Italian state holding company, said that it would be selling part of its stake in the operating company to Conzorio Leonardo (CL), a consortium comprising Gemina, Falck, Italpetroli and Impregilo. Gemina’s shareholders include the Bennetton family, UniCredit, Changi Airport, Mediobanca, Generali and Fondiaria.

In February 2003, the sponsors closed a Eu1.8 billion refinancing for the two airports, which marked the second takeout of acquisition debt after the shareholders’ purchase of AdR. The new deal was split between Eu490 million in bank debt and Eu1.2 billion of Ambac- wrapped bonds of varying maturities, a deal that was structured to give the sponsors a more diversified investor base and flexible debt maturity profile.

At the time, the deal achieved widespread acclaim as the first ever application of Italian securitisation law to an entire business. The transaction was well-suited to the boom years, since the wrap from Ambac allowed the company to reach the broad universe of triple-A investors, but part of the bond debt is coming up to maturity and AdR does not have sufficient cash on hand to repay bondholders.

AdR needs to repay bondholders on tranche A1 of the debt, issued by Romulus Finance, the securitisation vehicle that was set up in 2003. The debt has a maturity of 10 years and a bullet repayment, meaning that the entire principal, Eu500 million, will be due in February 2013. Eu52.1 million is being held in a cash collateralisation account for the purpose of repaying tranche A1, which reduces the net balance slightly.

In February this year, Gemina and its legal adviser, Legance, started the formal negotiation process for refinancing the first slice of bond debt due from the refinancing in 2003. Gemina used seven of the club of eight banks – Barclays, BNP Paribas, Credit Agricole, Mediobanca, Natixis, RBS, Societe Generale and Unicredit – that closed a Eu100 million credit facility in August 2011, with only SG pulling out.

The banks, advised by Bonelli Erede Pappalardo, received credit approval by the beginning of April and are currently in the process of sifting through all of the required documentation before the deal can be brought to close. The sponsors were able to reduce the refinancing requirement to around Eu400 million, partly because some of the cash held at the operating company will be used to pay back bondholders.

The new facility will have a tenor of 3 years and a bullet repayment, so the sponsors will be looking for a capital markets exit later. In addition, banks are funding a Eu100 million credit facility, which will replace an existing revolver that is also coming up to maturity in February 2013. Banks are providing equal tickets across both tranches, which translates to a position of Eu62.5 million each.

Pricing is rumoured to exceed 300bp over 6-month Euribor. Margins in Italy remain stubbornly high, so banks have to structure the refinancing so that it will not adversely affect existing financial covenants, because the documentation stipulates that a minimum debt service coverage ratio of less than 1.1x would trigger a default. According to the project company, its debt service coverage ratio was roughly 2.0x at the end of last year.

The agreement should serve as a timely boost to Gemina. The financial documentation that governs the refinancing of the acquisition debt in 2003 triggers a cash trapping mechanism that blocks dividends to shareholders a year before maturity if no refinancing package is in place. Additionally, the refinancing should help alleviate some of the pressure from ratings agencies.

In December 2011, Moody’s downgraded the debt ratings for AdR’s bank loan facilities and senior secured bonds from Ba1 to Ba2. In March, Standard & Poor’s also placed AdR’s BB credit rating on credit watch, citing concerns over the company’s ability to meet its debt obligations in February 2013. But broader challenges, most of all a delay in government and concessionaire reaching agreement over the new tariffs, are also weighing heavily on AdR’s rating.

Unlike other European airports, the tariffs charged by AdR have remained fixed since the sponsors acquired the operating company in 2002, notwithstanding some minimal increases to keep pace with inflation. This inability to raise charges has caused agencies concerns about AdR’s ability not only to service its debt but also to undertake the capital expenditure needed to deal with the build-up in traffic expected at both of Rome’s airports.

Gemina is currently locked in negotiations with the Italian authorities about a tariff increase and most participants in the deal expect this to be concluded by the end of the year, which is the time-frame outlined in a decree from the incumbent Italian government. The rating agencies view AdR as having the risk profile of an investment grade borrower, so a renegotiation of the tariffs should mean that AdR is rewarded with a healthier credit rating.

This partly explains the ease with which AdR was able to roll over its existing debt obligations. “There are three reasons banks were willing to lend. First is probably because these banks are relationship banks.” says one source. “Then because probably this time the banks have a certain feeling that the new tariffs should arrive, hopefully by the end of the year. The third reason is that the banks’ feeling is that even without the new tariffs AdR is a high-quality asset with strong cashflow generation.”