DBRS Confirms Palladium Securities 1 SA Series 131 Instruments – Republic of Italy Collateral at A (low) (sf)

DBRS Ratings Limited (DBRS) has today confirmed its A (low) (sf) rating on the €171.0 million Series 131 Fixed to Floating Rate Instruments due 2021 (the Notes) issued by Palladium Securities 1 S.A. Acting in Relation to Compartment 131-2014-06 (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 sovereign inflation-linked bond issued by the Republic of Italy (the Collateral), ISIN IT0004604671. The noteholders and other transaction counterparties have recourse only to the assets in Compartment 131-2014-06 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 Hedging Counterparty defaults. The transaction documents do not contain any downgrade provisions with respect to the Hedging Counterparty. As such, DBRS regards the rating of the Notes to be linked to those of the Collateral and Hedging Counterparty.

The current rating action is the result of a surveillance annual review of the transaction.

This is the first rating action since the initial rating date.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable is “Rating CLOs and CDOs of Large Corporate Credit”. Other methodologies and criteria referenced in this transaction are listed at the end of this press release.

A review of the transaction’s legal documents was not conducted as the documents have remained unchanged since the most recent rating action.

This can be found on www.dbrs.com at:
http://www.dbrs.com/about/methodologies

The sources of information used for this rating include Palladium Securities 1 SA and other public sources.

DBRS does not rely upon third-party due diligence in order to conduct its analysis; however, Agreed upon Procedures (AUP) are included in the requested documentation, as applicable. DBRS was not supplied with AUP for this transaction.

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. The extent of any factual investigation or independent verification depends on facts and circumstances.

DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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

  --    A one notch downgrade to the Collateral rating.
  --    A one notch downgrade to the Hedging Counterparty rating.

DBRS concludes that a hypothetical downgrade to the Collateral rating by one notch, ceteris paribus, would lead to a downgrade of the transaction to BBB (high) (sf). A hypothetical one notch downgrade to the Hedging Counterparty rating, ceteris paribus, would not impact the current rating. A scenario combining both the downgrade of the collateral rating and the Hedging Counterparty rating would lead to a downgrade of the Series 131 Instruments to BBB (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.

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

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

Initial Lead Analyst: Kathy Schroeder
Initial Rating Date: 6 May 2014
Initial Rating Committee Chair: Jerry van Koolbergen

Lead Surveillance Analyst: Alfonso Candelas
Rating Committee Chair: Jerry van Koolbergen

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

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

A description of how DBRS analyses structured finance transactions and how its methodologies are collectively applied can be found at: http://www.dbrs.com/research/278375