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

DBRS Ratings GmbH (DBRS Morningstar) upgraded its credit 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 (high) (sf) from A (sf)
-- TAGUS SOCIEDADE DE TITULARIZAÇÃO DE CRÉDITOS, S.A. (EnergyOn No. 1), Interest Rate Swap (IRS) to A (high) (sf) from A (sf)
-- TAGUS SOCIEDADE DE TITULARIZAÇÃO DE CRÉDITOS, S.A. (EnergyOn No. 2), Class A to A (high) (sf) from A (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” with a Stable trend, from A (low) with a Stable trend, on 21 July 2023. For further details on the upgrade of the Republic of Portugal, please visit the following link:
https://www.dbrsmorningstar.com/research/417504/dbrs-morningstar-upgrades-portugal-to-a-stable-trend.

As a result, on 25 July 2023, DBRS Morningstar published a press release commenting that it was undertaking a review of all structured finance and covered bonds transactions that it rated, following the Republic of Portugal’s sovereign rating upgrade. For further details, please visit the following link:
https://www.dbrsmorningstar.com/research/417606/dbrs-morningstar-comments-on-structured-finance-and-covered-bond-transactions-following-republic-of-portugal-upgrade.

Following the sovereign rating action, DBRS Morningstar upgraded the ratings on 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 Portuguese 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 credit rating actions on any other transactions are expected 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.
-- An update on the DBRS Morningstar private rating of Deutsche Bank AG, London Branch (DB London), following an upgrade on the Long Term Issuer Rating of its parent company Deutsche Bank AG to “A”, Stable trend on 29 June 2023:
https://www.dbrsmorningstar.com/research/416529/dbrs-morningstar-upgrades-deutsche-banks-long-term-issuer-rating-to-a-stable-trend.

The credit ratings on the notes address the timely payment of interest and the ultimate repayment 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 credit 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 credit rating on the IRS is also limited to a maximum two-notch uplift from Portugal’s current local currency sovereign rating.

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 credit 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.

DBRS Morningstar’s credit rating on the notes in both transactions address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents.

DBRS Morningstar’s credit rating does not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
General 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 24,274 in 2022 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.

Credit rating actions on Portugal are likely to have an impact on these credit ratings. ESG factors that have a significant or relevant effect on the credit analysis of Portugal are discussed separately at https://www.dbrsmorningstar.com/research/417504/dbrs-morningstar-upgrades-portugal-to-a-stable-trend.

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.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit ratings is the “Master European Structured Finance Surveillance Methodology” (7 February 2023), https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology.

Other methodologies referenced in these transactions are listed at the end of this press release.

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 credit rating actions.

For a more detailed discussion of the sovereign risk impact on Structured Finance credit 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 credit 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 credit ratings, DBRS Morningstar was not supplied with third-party assessments. However, this did not impact the credit rating analysis.

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

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

The last credit rating actions on these transactions took place on 21 September 2022, when DBRS Morningstar upgraded its credit ratings on the notes in both transactions to A (sf) from A (low) (sf).

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

-- A hypothetical downgrade of the sovereign rating of Portugal by one notch, ceteris paribus, would likely lead to the rated notes to remain at A (high) (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 (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 (high) (sf).
-- A hypothetical upgrade of the sovereign rating of Portugal by two notches, ceteris paribus, would likely lead to the rated notes to remain at 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://registers.esma.europa.eu/cerep-publication/. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

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

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

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500

Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

The credit 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 (30 June 2023), https://www.dbrsmorningstar.com/research/416730/legal-criteria-for-european-structured-finance-transactions.
-- Master European Structured Finance Surveillance Methodology (7 February 2023), https://www.dbrsmorningstar.com/research/409485/master-european-structured-finance-surveillance-methodology.
-- Interest Rate Stresses for European Structured Finance Transactions (22 September 2022), https://www.dbrsmorningstar.com/research/402943/interest-rate-stresses-for-european-structured-finance-transactions.
-- Derivative Criteria for European Structured Finance Transactions (16 June 2023), https://www.dbrsmorningstar.com/research/415976/derivative-criteria-for-european-structured-finance-transactions.
-- Rating Portuguese Electricity Tariff Securitisations (11 November 2022), https://www.dbrsmorningstar.com/research/405292/rating-portuguese-electricity-tariff-securitisations.
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (4 July 2023),
https://www.dbrsmorningstar.com/research/416784/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].