DBRS Morningstar Upgrades Ratings on Portuguese Electricity Tariff Securitisations Following Portugal’s Sovereign Rating Upgrade

DBRS Ratings GmbH (DBRS Morningstar) upgraded its ratings on the notes issued by two Portuguese electricity tariff securitisations (the PT Electricity Tariff Transactions), as follows:

-- TAGUS SOCIEDADE DE TITULARIZAÇÃO DE CRÉDITOS, S.A. (EnergyOn No. 1), Class A1 to A (sf) from A (low) (sf)
-- TAGUS SOCIEDADE DE TITULARIZAÇÃO DE CRÉDITOS, S.A. (EnergyOn No. 1), Interest Rate Swap (IRS) to A (sf) from A (low) (sf)
-- TAGUS SOCIEDADE DE TITULARIZAÇÃO DE CRÉDITOS, S.A. (EnergyOn No. 2), Class A to A (sf) from A (low) (sf)

The upgrades follow an entire review of the transactions following the upgrade of the Republic of Portugal’s Long-Term Foreign and Local Currency – Issuer Ratings to A (low) with a Stable trend, from BBB (high) with a Positive trend, on 26 August 2022 (see DBRS Morningstar’s press release titled, “DBRS Morningstar Upgrades the Republic of Portugal to A (low), Trend Changed to Stable”).

Following the sovereign rating action, DBRS Morningstar upgraded the ratings of the aforementioned Portuguese electricity tariff securitisations by one notch, given the link between the performance of these transactions and the creditworthiness of the Portuguese sovereign.

DBRS Morningstar reviewed the impact of the reduced country risk for all the transactions in accordance with the sovereign risk impact on structured finance ratings, as described in “Appendix C: The Impact of Sovereign Ratings on Other DBRS Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/401817/global-methodology-for-rating-sovereign-governments.

No further rating actions are expected to any other transactions as a result of this sovereign upgrade.

Additionally, the review of the PT Electricity Tariff Transactions incorporated the following analytical considerations:
-- No expected adverse change in the legal or regulatory framework.
-- No exposure to the credit risk of any specific entity in the transaction.

The ratings on the notes address the timely payment of interest and the ultimate payment of principal on or before the legal final maturity date in May 2025.

The PT Electricity Tariff Transactions are static securitisations of Portuguese electricity tariff receivables (Credit Rights) assigned to the Issuer, TAGUS Sociedade de Titularização de Créditos, S.A., by EDP – Serviço Universal, S.A. – NR (EDP-SU). Pursuant to the Portuguese Decree-Law 29/2006 (as subsequently amended and republished), EDP-SU has the right to recover any amounts arising from the difference between the costs of acquiring electricity under the special regime generation according to administrative prices and the sale price of the respective electricity valued according to market prices. All Portuguese electricity consumers pay the Credit Rights through their inclusion in the tariffs on a permanent basis as a component of the Global Use of System Tariff, or total rate per unit paid by end consumers.

Based on DBRS Morningstar’s “Rating Portuguese Electricity Tariff Securitisations” methodology, the ratings on securities issued by the PT Electricity Tariff Transactions are limited to a maximum two-notch uplift from the current local currency sovereign rating on Portugal.

In addition, the IRS payments to EnergyOn No. 1’s Swap Counterparty are senior to the Class A1 notes in the priority of payments and are based on DBRS Morningstar’s “Rating Portuguese Electricity Tariff Securitisations” methodology. The rating on the IRS is also limited to a maximum two-notch uplift from Portugal’s current local currency sovereign rating.

Deutsche Bank AG, London Branch (DB London) acts as the account bank for the two PT Electricity Tariff Transactions. Based on the DBRS Morningstar private rating on DB London, the downgrade provisions outlined in the transactions documents, and structural mitigants inherent in the transaction structures, DBRS Morningstar considers the risk arising from the exposure to DB London to be consistent with the ratings assigned to the notes, as described in DBRS Morningstar’s “Legal Criteria for European Structured Finance Transactions” methodology.

DB London is the Swap Counterparty of EnergyOn No. 1 and Banco Santander SA is the Swap Counterparty of EnergyOn No. 2. The DBRS Morningstar private rating on DB London and the DBRS Morningstar Long-Term Critical Obligations Rating of AA (low) on Banco Santander SA are consistent with the First Rating Threshold as defined in DBRS Morningstar’s “Derivative Criteria for European Structured Finance Transactions” methodology.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Social (S) Factors
The transaction’s performance is dependent on the creditworthiness of the Portuguese sovereign. DBRS Morningstar considers some of the key drivers behind the latest rating action on Portugal, namely Human Capital and Human Rights, to be a significant rating factor. According to the World Bank, Portugal’s per capita GDP was relatively low at USD 24,300 in 2021 compared with its euro system peers. This factor was taken into account in the “Economic Structure and Performance” building block of DBRS Morningstar’s Global Methodology for Rating Sovereign Governments.

There were no Environmental/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17 May 2022).

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is the “Master European Structured Finance Surveillance Methodology” (19 May 2022).

Other methodologies referenced in these transactions are listed at the end of this press release. These may be found at: http://www.dbrsmorningstar.com/about/methodologies.

DBRS Morningstar has applied the principal methodology consistently and conducted a review of the transactions in accordance with the principal methodology.

A review of the transactions legal documents was not conducted as the legal documents have remained unchanged since the most recent rating actions.

For a more detailed discussion of the sovereign risk impact on Structured Finance ratings, please refer to “Appendix C: The Impact of Sovereign Ratings on Other DBRS Morningstar Credit Ratings” of the “Global Methodology for Rating Sovereign Governments” at: https://www.dbrsmorningstar.com/research/401817/global-methodology-for-rating-sovereign-governments.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings

The sources of data and information used for these ratings include investor reports provided by DB London for both EnergyOn No. 1 and EnergyOn No. 2.

DBRS Morningstar did not rely upon third-party due diligence in order to conduct its analysis.

At the time of the initial ratings, DBRS Morningstar was supplied with third-party assessments. However, this did not impact the rating analysis.

DBRS Morningstar considers the data and information available to it for the purposes of providing these ratings to be of satisfactory quality.

DBRS Morningstar does not audit or independently verify the data or information it receives in connection with the rating process.

The last rating actions on these transactions took place on 11 April 2022, when DBRS Morningstar confirmed the ratings on the notes in both transactions at A (low) (sf).

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

-- A hypothetical downgrade of the sovereign rating of Portugal by one notch, ceteris paribus, would likely lead to a downgrade of the rated notes to A (low) (sf).
-- A hypothetical downgrade of the sovereign rating of Portugal by two notches, ceteris paribus, would likely lead to a downgrade of the rated notes to A (low) (sf).
-- A hypothetical upgrade of the sovereign rating of Portugal by one notch, ceteris paribus, would likely lead to the rated notes to remain at A (sf).
-- A hypothetical upgrade of the sovereign rating of Portugal by two notches, ceteris paribus, would likely lead to a upgrade of the rated notes to A (high) (sf).

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

These ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Preben Cornelius Overas, Senior Analyst
Rating Committee Chair: Alfonso Candelas, Senior Vice President
Initial Rating Dates: 8 April 2011

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

The rating methodologies used in the analysis of these transactions can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Legal Criteria for European Structured Finance Transactions (22 July 2022), https://www.dbrsmorningstar.com/research/400166/legal-criteria-for-european-structured-finance-transactions.
-- Master European Structured Finance Surveillance Methodology (19 May 2022), https://www.dbrsmorningstar.com/research/397033/master-european-structured-finance-surveillance-methodology.
-- Interest Rate Stresses for European Structured Finance Transactions (24 September 2021), https://www.dbrsmorningstar.com/research/384920/interest-rate-stresses-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (20 September 2021), https://www.dbrsmorningstar.com/research/384624/derivative-criteria-for-european-structured-finance-transactions.
-- Rating Portuguese Electricity Tariff Securitisations (26 August 2021), https://www.dbrsmorningstar.com/research/383462/rating-portuguese-electricity-tariff-securitisations.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022), https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/278375.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].