DBRS Rates Palladium Securities 1 SA Series 95 Notes – Collateral Guarantor Enel SpA

DBRS Ratings Limited (“DBRS”) has today assigned final long-term obligation ratings to the EUR 22 million Series 95 Fixed to Floating Rate Notes due September 2022 (the “Notes”) issued by Palladium Securities 1 S.A. acting in relation to Compartment 95-2012-22 (“the Issuer”).

The Issuer is a public limited liability company (société anonyme) incorporated under the laws of the Grand Duchy of Luxembourg. The transaction is a cash flow securitisation collateralised by a corporate bond issued by Enel Finance International NV (the “Collateral”), which is guaranteed by Enel SpA (the “Collateral Guarantor”). The noteholders and other transaction counterparties have recourse only to the assets in Compartment 95-2012-22 in accordance with Luxembourg law.

The transaction is a credit linked note (“CLN”) in which the Issuer uses an asset swap (the “Asset Swap”) to transform the payout profile of a debt security. The noteholders are effectively exposed to the risk that either the Collateral or the counterparties default. The transaction documents do not contain any downgrade provisions with respect to the Hedging Counterparty or the Custodian. As such, DBRS regards the rating of the Notes to be linked to those of the Collateral and the lowest-rated of these counterparties.

Under the Asset Swap that the Issuer has entered into with the Hedging Counterparty:
• The Hedging Counterparty sells the par amount of EUR 22 million of the Collateral to the Issuer and receives payment on the 26 March 2013 (the Trade Date”).
• The Issuer passes the interest payments received from the Collateral to the Hedging Counterparty as and when they occur.
• The Hedging Counterparty makes the interest payments as specified in the Asset Swap Agreement to the issuer. The Interest Payment Dates are the 14th day of September, starting in 2013 and finishing in 2022.
• The Hedging Counterparty pays the Fixed Rate of 3.80% per annum in arrears starting from 14 September 2013 up to and including the Interest Payment Date in 2017.
• The Hedging Counterparty pays the Floating Rate which is the 10 year EUR CMS rate set two days before the Interest Payment Dates, also paid in arrears There is no additional margin but the Floating Rate is subject to a minimum of 2.00% per annum and a ceiling of 7.00% per annum. The first Floating Rate payment will be made on the Interest Payment date in 2018 and will end on that in 2022.
• At the scheduled maturity, the Hedging Counterparty will receive the Collateral from the Issuer and pay EUR 22 million.

The significant counterparties to the Issuer are various subsidiaries and affiliates of Deutsche Bank AG, and are listed below. DBRS maintains private ratings on these counterparties. Private ratings are not published.
• Deutsche Bank AG, London Branch acts as hedging counterparty (the “Hedging Counterparty”), initial purchaser of the Notes, calculation agent, selling agent and Arranger, and pays the fees and expenses of the Issuer.
• Deutsche Bank Luxembourg S.A., a wholly owned subsidiary of Deutsche Bank AG, acts as custodian (the “Custodian”).
• Deutsche Trustee Company Limited acts as trustee (the “Trustee”).

DBRS maintains an internal assessment on the Collateral Guarantor to evaluate the credit risk of the Collateral and monitor its credit risk on an ongoing basis. DBRS does not rate the Collateral or the Collateral Guarantor. The internal assessment of the Collateral Guarantor is an opinion regarding its creditworthiness based primarily upon pubic ratings. Internal assessments are not ratings, and are not published.

In addition to the credit profiles of the Collateral, the Custodian and the Hedging Counterparty, the rating of the Notes is based upon DBRS’s review of the following items:
• The transaction structure.
• The transaction documents including, but not limited to, the Base Prospectus, the General Trust Terms Module, the Security Module, the ISDA Master Agreement Module, the Custodian Agreement, the Sale and Disbursement Agreement, the Articles of Incorporation, the Final Terms, the Series Instrument, and the Asset Swap Agreement letter.
• The legal opinions addressing, but not limited to, true sale of the Collateral, bankruptcy remoteness of the Compartment, enforceability of the contracts and agreements, and no tax to be withheld at the Issuer level.
• The documentation has been assessed as to its compliance with the DBRS Legal Criteria for European Structured Finance Transactions and the DBRS Swap Criteria for European Structured Finance Transactions.

DBRS did not address the following:
• The pricing of the Asset Swap. That is, whether there will be sufficient cash flows from the Collateral to fully compensate the Hedging Counterparty for its obligations. As the Hedging Counterparty is contractually obliged to make the payment as specified under the Asset Swap agreement, the risk that it defaults is addressed by the DBRS private rating.
• Cash flow modeling to assess the returns due to the noteholders.

The transaction can terminate early on the occurrence of an event of default, mandatory cancellation or cancellation for taxation and other reasons.

Events of default include, but are not limited to, the following:
• Failure to pay any amount due on the Notes beyond the grace period.
• The Issuer fails to perform its obligations under the Series Instrument.
• There is an order by any competent court ordering the dissolution of the Issuer or the Company for whatever reason that includes, but is not limited to, bankruptcy, fraudulent conveyance and merger.

Mandatory cancellation includes:
• The Collateral becomes repayable other than at the option of the relevant Collateral Obligor in accordance with the terms of the Collateral.
• The Collateral becomes, for whatever reason, capable of being declared due and payable prior to its stated maturity.
• The Collateral defaults.

Similarly, cancellation for taxation etc. includes:
• The Issuer would be required to withhold tax on the next payment date.
• The Hedging Agreement is terminated.

Under the Series Instrument, the amount payable to the noteholders is determined as:

The market value of the Collateral MINUS the Early Termination Unwind Costs.

The Early Termination Unwind Costs are determined as the sum of:
i. The amount of (a) all costs, taxes, fees, expenses (including loss of funding) etc. incurred by the Hedging Counterparty (positive amount), OR (b) the gain realised by the Hedging Counterparty (negative amount) due to the cancellation of the Asset Swap; and,
ii. Legal and other cost incurred by the Issuer, Trustee, Custodian and Hedging Counterparty.

There will not be any reporting by the Trustee or the Custodian that would be expected in a typical structured finance transaction. Therefore, DBRS will receive such information as it regards as being necessary to monitor the transaction and thus to assess the rating on at least an annual basis.

The principal methodology applicable is Rating Methodology for CLOs and CDOs of Large Corporate Credit, which can be found on www.dbrs.com.

The sources of information used for this rating include the Issuer, Palladium Securities 1 S.A., and the Arranger, Deutsche Bank AG, London Branch. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating concerns a newly issued financial instrument. This is the first DBRS rating on this financial instrument.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

For additional information on DBRS European CLO and Tranched Credit Derivatives, please see European Disclosure Requirements, located at http://www.dbrs.com/research/237794.

Lead Analyst: Simon Ross
Rating Committee Chair: Jerry van Koolbergen
Initial Rating Date: 26 March 2013

Notes:
All figures are in Euros unless otherwise noted.