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Fitch Downgrades Five Spanish Electricity Tariff Deficit Securitisations to 'BBBsf'

January 29, 2014

MADRID& LONDON --(BUSINESS WIRE)-- Fitch Ratings has downgraded five securitisations backed by Spanish electricity tariff deficit credit rights, as follows: Alectra Finance plc (Alectra): downgraded to 'BBBsf' from 'BBB+sf'; Outlook Negative Bliksem Funding Ltd (Bliksem): downgraded to 'BBBsf' from 'BBB+sf'; Outlook Negative Rayo Finance Ireland (No.1) (Rayo Finance 3) - Series 3: downgraded to 'BBBsf' from 'BBB+sf'; Outlook Negative Rayo Finance Ireland (No.1) (Rayo Finance 4) - Series 4: downgraded to 'BBBsf' from 'BBB+sf'; Outlook Negative Delta SPARK Limited 2008-1 (Delta Spark): downgraded to 'BBBsf' from 'BBB+sf'; Outlook Negative Alectra, Bliksem, Rayo Finance 3 and Rayo Finance 4 are securitisations of the electricity tariff deficit (TD) incurred in Spain during 2005, while Delta SPARK is a securitisation of the TD incurred during 2007 and 1Q08. KEY RATING DRIVERS The downgrades reflect Fitch's opinion that the sustainability of the Spanish electricity system has weakened as a result of uncertainty created by the multiple legal initiatives and the missed target reduction of the TD in 2013. The Spanish government has not been successful in laying a concrete agenda to fix the fundamental imbalances that result in electricity TD. Various laws were introduced in 2012-2013 to reduce regulated system costs and minimise the creation of new TD. The last (24/2013), which passed on 26 December 2013 , established among other things that new revenue shortfalls will have to be borne by a broader base of electricity system agents. All together, these measures have failed to bring a credible or predictable end to the problem of TD in Spain. According to the Spanish legal framework TD holders are safe from cash-flow shortfalls, as TD annuities are not subject to discounts if system revenues do not cover all system costs. However, Fitch believes such protection mechanism offered by the current legal regime could not be relied on under a stress scenario. In the agency's view, the repayment of existing TD annuities by the creation of additional TD is not an effective plan to resolve the issue. The latest estimation of TD at FYE13 is EUR3.6bn , which has been influenced by the government's decision to withdraw extraordinary support measures such as a EUR2.2bn direct state funding previously committed. The FYE13 TD will have to be reflected on utilities' balance sheets and has contributed to their ratings being maintained on Watch Negative. Fitch believes that the decision to drop the support measures reflects the government's priority to reduce its public deficit, and provides evidence of political interference that affects the electricity sector in the absence of a truly independent regulatory body. Under a base case scenario, the downgraded transactions are expected to continue to perform because TD annuities will continue to be paid irrespective of future system revenue shortfalls. Nevertheless, the performance of TD receivables under stress depends also on the ability of various system operators including the large utilities to absorb and finance the imbalances. Fitch maintained Endesa SA (BBB+/RWN/F2) and Iberdrola SA (BBB+/RWN/F2) on RWN last 16 January 2014 in the absence of any meaningful regulatory change affecting the remuneration of regulated electricity activities. RATING SENSITIVITIES The notes could be downgraded further if legal uncertainties increase. For example, political interference can weaken the already fragile independence of the sector regulator. Fitch sees regulator independence as key to the implementation of sustainable long term policies and the execution of corrective measures to fully repay TD outstanding amounts. Downgrades could also result from changes in the credit quality of Spain (BBB/Stable/F2) or the ratings of the major players in the Spanish electricity sector. The Negative Outlook on these TD securitisations reflects our opinion that the regulatory risk of the Spanish electricity sector is high and the regulatory measures introduced so far to address the TD issues unreliable. With a cumulative TD of almost 30bn as of FYE13 representing almost 200% of annual regulated revenues, and a weak track record of execution in 2013, we judge the ratings are still exposed to downward pressure. On the other hand, the notes could be upgraded if the economic environment in Spain improves and the fundamental imbalances are eliminated, and a credible strategic plan to correct the imbalances is delivered by policy makers. The legislation governing the repayment of TD in each of the above transactions is slightly different. While the 2005 deficit is repaid by a specific surcharge applied to electricity bills and access tolls, the 2007 deficit is repaid as part of the general obligations of the electricity system. Fitch views that the current legislation provides a mechanism to ensure that revenue shortfalls do not affect the repayment of TD by the relevant final payment dates. Fitch will continue to monitor the cash flow performance at the transaction level as well as the overall electricity system cash flows and, if the imbalances are still present, will adjust the ratings accordingly. Additional information is available at www.fitchratings.com . This action has considered information on the transactions' investor reports and CNMC liquidation reports, in addition to the sources of information identified in the criteria reports mentioned below. Applicable criteria, 'Global Structured Finance Rating Criteria', dated 24 May 2013 , and 'Criteria for Rating Caps and Limitations in Global Structured Finance Transactions', dated 12 June 2013 , are available at www.fitchratings.com . Applicable Criteria and Related Research : Global Structured Finance Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708661 Criteria for Rating Caps and Limitations in Global Structured Finance Transactions http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709840 Additional Disclosure Solicitation Status http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=818070 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS . IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE ' WWW.FITCHRATINGS.COM '. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Fitch Ratings Lead Surveillance Analyst Carlos Terre +34 917 025 772 Fitch Ratings Espana SAU General Castanos , 11, 1 28004 Madrid or Committee Chairperson Andreas Wilgen Managing Director +44 203 530 1171 or Media Relations: Sandro Scenga , +1-212-908-0278 ( New York ) sandro.scenga@fitchratings.com Source: Fitch Ratings


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