DBRS Morningstar Confirms Rating on Series 112 Notes of Palladium Securities 1 S.A. Acting in Relation to Compartment 112-2013-12 at BBB (high) (sf)

DBRS Ratings GmbH (DBRS Morningstar) confirmed its BBB (high) (sf) rating of the Series 112 Floating-Rate Notes due 2023 (the Notes) issued by Palladium Securities 1 S.A. Acting in Relation to Compartment 112-2013-12 (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 N.V. (the Collateral), which is guaranteed by Enel S.p.A. (the Collateral Guarantor). The noteholders and other transaction counterparties have recourse only to the assets in Compartment 112-2013-12 in accordance with Luxembourg law.

The transaction is a credit-linked note in which the Issuer uses an 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 will default. The transaction documents contain no downgrade provisions with respect to Deutsche Bank AG, London Branch (acting as the hedging counterparty). As such, DBRS Morningstar regards the rating of the Notes to be linked to those of the Collateral and hedging counterparty.

DBRS Morningstar 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 Morningstar 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 public ratings. Internal assessments are not ratings and DBRS Morningstar does not publish them.

The confirmation follows an annual surveillance of the transaction.

Under the asset swap that the Issuer has entered into with Deutsche Bank AG, London Branch, the terms are as follows:

-- The hedging counterparty sells the par amount of EUR 100 million of the Collateral to the Issuer and received payment on 16 April 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 on the 17th day of April, from 2014 to 2023.
-- The hedging counterparty pays the floating rate, which is the 10-year euro constant maturity swap 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 3.00% per annum and a ceiling of 5.10% per annum. The first interest payment was made on the interest payment date in 2014 and will end on that date in 2023.
-- At the scheduled maturity, the hedging counterparty will receive the Collateral from the Issuer and pay EUR 100 million.

The significant counterparties to the Issuer are listed below. DBRS Morningstar maintains private ratings on these counterparties, which it does not publish, except on European Depository Bank S.A., not rated by DBRS Morningstar.
-- 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 the Luxembourg paying agent.
-- European Depository Bank S.A. acts as the custodian and servicer since 17 December 2021 when it replaced Deutsche Bank Luxembourg S.A. in such capacities.
-- Deutsche Trustee Company Limited acts as the trustee.

In addition to the credit profiles of the Collateral and the hedging counterparty, the rating of the Notes is based on DBRS Morningstar’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, the true sale of the Collateral, bankruptcy remoteness of the Issuer, asset segregation of the compartment, enforceability of the contracts and agreements, and the fact that no tax will be withheld at the Issuer level.

DBRS Morningstar 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 Morningstar private rating.
-- Cash flow analysis 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 occur under, but are not limited to, the following scenarios:

-- Failure to pay any amount due on the Notes beyond the grace period.
-- The Issuer’s failure to perform its obligations under the series instrument.
-- Any competent court ordering the dissolution of the Issuer for whatever reason that includes, but is not limited to, bankruptcy, fraudulent conveyance, or a merger.

Mandatory cancellation includes the following:

-- 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 following:
-- 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 the hedging counterparty.

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

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant impact 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.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the ratings is: “Rating CLOs and CDOs of Large Corporate Credit” (26 January 2022).

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

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

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

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 this rating include Palladium Securities 1 S.A. and other public sources.

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

At the time of the initial rating, DBRS Morningstar was not 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 this 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 action on this transaction took place on 14 January 2022, when DBRS Morningstar confirmed its BBB (high) (sf) rating on the Notes.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.

To assess the impact of changing the transaction parameters on the ratings, DBRS Morningstar 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 Morningstar concludes that a hypothetical downgrade of the Collateral rating by one notch, ceteris paribus, would lead to a downgrade of the transaction to BBB (sf). A hypothetical one-notch downgrade of the Hedging Counterparty rating, ceteris paribus, would not impact the current rating. A scenario combining both the downgrade of the Collateral rating and of the hedging counterparty rating would lead to a downgrade of the Series 112 instruments to BBB (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.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Alfonso Candelas, Senior Vice President
Rating Committee Chair: Christian Aufsatz, Managing Director
Initial Rating Date: 16 April 2013

DBRS Ratings GmbH
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The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Derivative Criteria for European Structured Finance Transactions (20 September 2021),
https://www.dbrsmorningstar.com/research/384624/derivative-criteria-for-european-structured-finance-transactions.
-- Legal Criteria for European Structured Finance Transactions (22 July 2022),
https://www.dbrsmorningstar.com/research/400166/legal-criteria-for-european-structured-finance-transactions.
-- Rating CLOs and CDOs of Large Corporate Credit (26 January 2022),
https://www.dbrsmorningstar.com/research/391226/rating-clos-and-cdos-of-large-corporate-credit.
-- 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].