OREANDA-NEWS. March 12, 2015. De-linking the credit profile of electricity tariff deficits (TD) securitisations from macro-economic and regulatory risks is more difficult than for other assets like mortgages or consumer loans, Fitch Ratings says. The much stronger influence of macro-economic factors, utility system governance and regulatory risks explains why TD securitisations cannot achieve the maximum six notches above the relevant sovereign rating as is the case for other structured finance transactions in developed markets.

In a TD securitisation, the underlying asset is established by law and results from the operation of a socially essential service - electricity supply. This makes a sovereign more likely to intervene to alleviate hardship for its citizens at times of economic stress (when the sovereign rating may also come under pressure) by amending governing laws or changing the regulatory framework. Our central expectation is that economic trends and regulatory policies have an impact on TD recoverability and the rating criteria need to consider this.

We believe the combination of regulatory and macro risks (for example, system revenues may fall during a downturn) is only compatible with a positive differential between the TD securitisation and sovereign ratings of up to three notches (see 'Rating Criteria for Portuguese and Spanish Electricity Tariff Deficit Securitisations,' at www.fitchratings.com).

Fitch's maximum achievable rating on TD securitisations appears different from Moody's approach, as it rates up to six notches above the sovereign IDR. For example, Moody's rates Volta I, II and III Portuguese TD transactions, at A1(sf), versus its Portuguese sovereign rating of Ba1. In its Volta III pre-sale report, Moody's states that its rating "does not address the risk should the Decree-Law be overturned by the Portuguese State in future." It says that "any changes to the regulatory framework could potentially have credit implications for this transaction" and that change in the legal framework of the Portuguese electricity system "may have a significant impact on the subject transaction's ratings."

In our most recent rating assigned to structured finance (SF) notes backed by the Portuguese TD credit rights, the 'BBBsf'/Stable rating on Volta III is two notches higher than the Portuguese sovereign rating of 'BB+'/Positive (see our presale report Tagus STC/Volta III, released on Monday). While we believe the Portuguese electricity system is being managed in line with a credible plan to eliminate TDs, high performance deviations in 2012-2014 have weakened the system's key performance indicators (KPIs). For this reason the maximum possible uplift of three notches has not been achieved.

The revision of the Outlooks on Tagus Volta I and Volta II's 'BBBsf' ratings to Stable from Positive on Monday reflects the deterioration in forecast KPIs from our previous assessment.

Fitch rates six electricity TD securitisations in Spain, one of which is Fondo de Titulizacion del Deficit del Sistema Electrico (FADE) that is fully guaranteed by the Kingdom of Spain, and three in Portugal. As well as sovereign risk, our rating approach focuses on the regulatory environment, electricity system sustainability, and assets and structural arrangements.

We monitor the accounts of the electricity system in both countries to assess its credit profile and the scale of existing and projected imbalances. The absence of structural subordination and sequential liability paydown of TD securitisations implies these transactions do not gain credit protection as the pool of assets amortises over time.