March 18 (The following statement was released by the rating agency) Fitch Ratings has downgraded five securitisations backed by the Spanish electricity tariff deficits, as follows: - Alectra Finance plc (Alectra): downgraded to 'BBB+sf' from 'A-sf'; Outlook Negative - Bliksem Funding Ltd (Bliksem): downgraded to 'BBB+sf' from 'A-sf'; Outlook Negative - Rayo Finance Ireland (No.1) (Rayo Finance 3) - Series 3: downgraded to 'BBB+sf' from 'A-sf'; Outlook Negative - Rayo Finance Ireland (No.1) (Rayo Finance 4) - Series 4: downgraded to 'BBB+sf' from 'A-sf'; Outlook Negative - Delta SPARK Limited 2008-1 (Delta Spark): downgraded to 'BBB+sf' from 'A-sf'; Outlook Negative KEY RATING DRIVERS The downgrades reflect the structural imbalance and the negative trend observed on the overall electricity system cash flows as well as the uncertainty of the regulatory environment affecting the electricity sector. Despite the government's efforts during 2012 to tackle the on-going tariff deficit problem, Fitch believes that the Spanish electricity system will likely continue generating tariff deficits beyond 2013. Based on the provisional liquidation reports obtained from the Comision Nacional de Energia's (CNE, the Spanish energy regulator) website during 2012, total tariff deficit annuities now represent approximately 21% of regulated system revenues, compared with 12% a year ago. Fitch considers this significant relative increase of tariff deficits as a proportion of regulated revenues is a consequence of weak economic prospects that suggest lower demand for energy consumption, increase in green energy subsidies and also that tariff deficits securitised through FADE are being remunerated at an annual coupon rate of 5%, which in itself is adding pressure to the overall system stability. Moreover, the agency considers the implementation of material additional pricing increases to provide enough incremental regulated revenues that largely mitigate the system deficits unlikely in the short term, considering the government already applied rises to the end-consumer tariffs last year. Fitch acknowledges that the transactions have been receiving cash flows to service their debt as expected. However, since the system is still generating tariff deficits which are being financed by the utility companies in Spain, the continuity of the electricity system and repayment of the system costs (which includes the tariff deficit annuities), as long as new tariff deficits are being generated, will rely on the ability of these companies to actually finance the imbalances. Fitch rates Endesa, S.A. ('BBB+'/Negative/'F2'); Iberdrola, S.A. ('BBB+'/Negative/'F2') and Gas Natural SDG, S.A. ('BBB+'/Stable/'F2'). RATING SENSITIVITIES Downgrade pressure on the notes could be triggered if the sector cash flow imbalances increase over the next two years or there is a substantial change in the credit quality of Spain ('BBB'/Negative/'F2') or the Spanish electricity utility sector. The notes could be upgraded if the economic environment in Spain improves and the imbalances are eliminated. Moreover, uncertainty with regards to the true independence of the sector regulator to be able to implement long-term policies and to prevent government interference could trigger additional rating revisions. Alectra, Bliksem, Rayo Finance 3 and Rayo Finance 4 are securitisations of the electricity tariff deficit incurred in Spain during 2005, while Delta SPARK is a securitisation of the tariff deficit incurred during 2007 and Q108. The legislation governing the repayment of each tariff deficit is slightly different. While the 2005 deficit is repaid by a specific surcharge applied to electricity bills and access tolls, the 2007 deficit is repaid as part of the general obligations of the electricity system. Fitch understands that under current legislation, the CNE is obliged to repay any outstanding amounts should the electricity system not generate enough revenue to fully repay the tariff deficits by the relevant final payment dates. Fitch will continue to monitor the cash flow performance at the transaction level as well as the overall electricity system cash flows and, if the imbalances are still present, will adjust the ratings accordingly.
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