Fitch Downgrades Five Spanish Electricity Tariff Deficit Securitisations to
MADRID& LONDON -- January 29, 2014
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
Bliksem Funding Ltd (Bliksem): downgraded to 'BBBsf' from 'BBB+sf'; Outlook
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';
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.
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
Applicable Criteria and Related Research:
Global Structured Finance Rating Criteria
Criteria for Rating Caps and Limitations in Global Structured Finance
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Lead Surveillance Analyst
+34 917 025 772
Fitch Ratings Espana SAU
General Castanos, 11, 1
+44 203 530 1171
Sandro Scenga, +1-212-908-0278 (New York)
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