DBRS Assigns Rating to Palladium Securities 1 S.A. Series 147 Instruments - Multiple Collateral

DBRS Ratings Limited (DBRS) has today assigned a rating of BB (high) (sf) to the EUR 56.6 million Series 147 Fixed Rate Instruments due 2024 (the Notes) issued by Palladium Securities 1 S.A. Acting in Relation to Compartment 147-2014-22 (the Issuer), ISIN XS1131273416.

The Issuer is a public limited liability company (société anonyme) incorporated under the laws of the Grand Duchy of Luxembourg. The transaction is a credit-linked note (CLN) of two corporate fixed-rate bonds (the Collateral). The Collateral is comprised of 28.3 million euro-denominated bonds issued by Assicurazioni Generali S.p.A. (5.125% bonds due 16 September 2024; ISIN: XS0452314536) and 22.15 million British pound-denominated bonds issued by ENEL Finance International NV (5.625% bonds due 14 August 2024; ISIN: XS0452188054), which together represent the full issue amount of the Palladium Series 147 Notes EUR 56.6 million. The noteholders and other transaction counterparties have recourse only to the assets in Compartment 147-2014-22 in accordance with Luxembourg law.

The transaction uses an asset swap to transform the payout profile of the collateral security. The noteholders are effectively exposed to the risk that either of the two bonds that constitute the Collateral or the Hedging Counterparty defaults. The transaction documents do not contain any downgrade provisions with respect to the Hedging Counterparty. As such, DBRS considers the Notes to be also exposed to the risk of default of the Hedging Counterparty. Deutsche Bank AG, London Branch will act as the Hedging Counterparty.

Under the asset swap:
--The Hedging Counterparty sells the par amount of EUR 56.6 million of the Collateral (28.3 million euro-denominated bonds issued by Assicurazioni Generali S.p.A. and 22.15 million British pounds-denominated bonds issued by ENEL Finance International NV) to the Issuer and receives payment on 10 February 2015 (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 Notes will pay interest annually on the 10 February, beginning in 2016 and ending in 2024.
--The Hedging Counterparty pays a fixed rate of 2.3% per annum for the first two years of the transaction. The subsequent payments on the Notes will be a fixed 0.5% interest plus a floating bonus interest subject to a bonus threshold. The bonus interest is equal to the five-year EUR constant maturity swap (CMS) less 0.5% as calculated each year subject, with a maximum rate of 3.75% and a minimum rate of 0.50% per annum. The bonus threshold, in respect of each interest rate period, is determined by the euro-U.S. dollar exchange rate being below or equal to 1.40. The fixed-rate and floating bonus interest rate in aggregate is equal to an interest rate of five-year EUR CMS (subject to a minimum of 1.00% and a maximum of 4.25%).
--At the scheduled maturity, the Hedging Counterparty will receive the Collateral from the Issuer and will pay EUR 56.6 million.

The significant counterparties to the Issuer are various subsidiaries and affiliates of Deutsche Bank AG as listed below. DBRS maintains private ratings on these counterparties, which are not published.
--Deutsche Bank AG, London Branch acts as the Hedging Counterparty, Initial Purchaser of the Notes, Calculation Agent, Paying 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, Luxembourg Paying agent and Servicer.
--Deutsche Trustee Company Limited acts as Trustee.

DBRS maintains Internal Assessments on the ratings of the corporate fixed-rate bonds that make up the Collateral. As per DBRS criteria, an Internal Assessment is an opinion on the creditworthiness of an Issuer based on either: (1) public rating(s) issued and maintained by other credit rating agencies (CRAs) that are registered in accordance with jurisdictional regulations, (2) DBRS analysis or (3) a combination of other CRA ratings and DBRS analysis. DBRS Internal Assessments are typically not made publically available. The Internal Assessments will be monitored on an ongoing basis to evaluate credit risk.

DBRS has previously rated multiple series under the Palladium Securities 1 S.A. program; however, this is the first issuance that DBRS has rated that has two corporate bonds comprising the Collateral. To address the increased risk of multiple Collateral, DBRS performed “jump to default” analysis on the combined probability of default assuming both nine-year and ten-year tenor of the bonds. Considering the Internal Assessments of the Assicurazioni Generali S.p.A. bonds and the ENEL Finance International NV bonds, DBRS determined the probability that either one or both bonds default. Based on the calculated combined probability of default, a rating can be determined by referencing the DBRS Idealised Default Table. Following the analytical process outlined above, DBRS concluded that the default probability of the rated Notes are commensurate with a BB (high) (sf) rating.

In addition to the credit profiles of the Collateral and the Hedging Counterparty, the rating of the Notes is based on DBRS’s review of the following items:
--The transaction structure.
--The transaction documents.
--The legal opinions addressing, but not limited to, true sale of the Collateral, bankruptcy remoteness of the Issuer, the asset segregation of the Compartment, enforceability of the contracts and agreements and no tax to be withheld at the Issuer level.

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 payments as specified under the Asset Swap Agreement, the risk that it defaults is addressed by the DBRS private rating.
--Cash flow modelling to assess the returns due to the noteholders, as the returns are reliant on the swap counterparty.

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.
--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 by the discretion 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 becomes required to withhold tax on the next payment date.
--Termination of the Hedging Agreement.

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:
(1) 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) as a result of the cancellation of the Asset Swap and
(2) Legal and other costs incurred by the Issuer, Trustee, Custodian and Hedging Counterparty.

It should be noted that the DBRS rating assigned to this security does not address changes in law or changes in the interpretation of existing laws. Such changes in law or their interpretation could result in the early termination of the transaction and the noteholders could be subjected to a loss on the Notes.

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 deems necessary to monitor the transaction and thus to assess the rating — on at least an annual basis.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is Rating Methodology for CLOs and CDOs of Large Corporate Credit (January 2014), which can be found on www.dbrs.com at http://www.dbrs.com/about/methodologies. Other methodologies and criteria referenced in this transaction are listed at the end of this press release.

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 does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

DBRS considers that 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.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

To assess the impact of the changing the transaction parameters on the rating, DBRS considered the following stress scenarios as compared with the parameters used to determine the rating (the Base Case):

--A one-notch downgrade to the Collateral rating of the single lowest rated collateral.
--A one-notch downgrade to the Hedging Counterparty rating.

DBRS concludes that a hypothetical one-notch downgrade to the rating of the lowest rated collateral, ceteris paribus, would not affect the current rating. A hypothetical one-notch downgrade to the Hedging Counterparty rating, ceteris paribus, would not affect the current rating. A scenario combining both a one-notch downgrade of the Collateral rating of the lowest rated collateral and a one-notch downgrade to the Hedging Counterparty rating would not impact the Series 147 Instrument rating of BB (high) (sf).

For further information on DBRS’s historic default rates published by the European Securities and Markets Administration (ESMA) in a central repository, see
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

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

Lead Analyst: Kathy Schroeder
Rating Committee Chair: Jerry van Koolbergen
Rating Date: 10 February 2015

As this is the initial rating, there is no last rating date.

DBRS Ratings Limited
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Registered in England and Wales: No. 7139960.

The rating methodologies and criteria used in the analysis of this transaction can be found at http://www.dbrs.com/about/methodologies.

--Rating Methodology for CLOs and CDOs of Large Corporate Credit
--Legal Criteria for European Structured Finance Transactions
--Derivative Criteria for European Structured Finance Transactions