OREANDA-NEWS. Fitch Ratings has assigned Tagus STC/Volta III - Electricity Receivables Securitisation 's senior notes due February 2019, a 'BBB(EXP)sf' expected rating. The Outlook is Stable. The transaction also features two unrated classes, Class R Notes and Liquidity Notes, to fund purpose specific reserves.

The transaction is a securitisation of Portuguese electricity tariff deficit (TD) receivables. The assets are a share of 2014 TD receivables. Tagus STC, S.A., as issuer, will purchase the TDs from EDP Servico Universal SA (EDP SU; the seller). The issuer will use the proceeds from the senior notes to purchase the credit rights at market value. EDP SU is a wholly owned affiliate of EDP Energias de Portugal, S.A. (BBB-/Stable/F3).

KEY RATING DRIVERS
System Imbalances
The recessionary environment and abnormal weather conditions that led to higher special regime subsidies caused significant imbalances in 2012-2014. Furthermore, Fitch believes that new gross tariff deficits will be generated until 2018, as system regulated revenues will not be sufficient to cover regulated costs (including scheduled amortisation of debt originated in prior years). However, Fitch expects total system debt to peak in 2015.

Commitment to System Sustainability
Fitch believes that the Portuguese government's commitment to reduce the system imbalances will enable the electricity system to reach sustainable levels in the medium term. Measures taken in 2012 and 2013 (in excess of EUR3bn) to achieve reduced electricity debt by 2020, together with modest growth in electricity consumption and access tariff increases, will have a cumulative positive impact on the system.

Regulatory Independence Reduces Risk
The track record of Entidade Reguladora dos Servicos Energeticos (ERSE; the regulator), coupled with the absence of adverse government interference, means there is only a remote risk of political intervention affecting TD repayments. The rise in access tariffs above 6% in each of the last two years has reinforced our view that ERSE's is a truly independent body.

Stable Rating Outlook
The Outlook on the notes is Stable, despite the Positive Outlook on the Portuguese sovereign IDR (BB+). This is based on the key performance indicators (KPIs), which are higher than expected. An upgrade of the notes' rating would be subject to an improvement in the KPIs. As such, an upgrade of the Portuguese sovereign IDR, which currently serves as a rating anchor to the notes, would not necessarily trigger an automatic upgrade of the notes.

RATING SENSITIVITIES
The notes' rating is based on the sustainability of the electricity system and the stability of the legal framework. The rating on the notes could be downgraded if the system deviates substantially from the sustainability plan. These drivers are more relevant than the Portuguese sovereign IDR, as reflected by the Stable Outlook of the notes and the Positive Outlook on the Portuguese sovereign.

A downgrade of Portugal's sovereign rating by two notches or more would automatically result in a downgrade of the notes. This is because Fitch believes that the maximum distance between the ratings of an electricity tariff deficit securitisation and the rating of the relevant sovereign is three notches. Fitch uses the sovereign rating as an anchor because the sovereign rating generally captures macroeconomic risk drivers that are relevant for electricity demand, like GDP growth, unemployment or industrial production.

A one-notch downgrade of Portugal would result in a downgrade of the notes, providing the Portuguese electricity system remained stable. This is because the current KPIs do not support more than the current two-notch uplift.