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Rating Action:

Moody's Investors Service assigns definitive ratings to the notes issued by Rayo Finance Ireland (No.1) Limited -- Series 5 Notes

22 Mar 2012

EUR 421.7 million of debt securities rated

London, 22 March 2012 -- Moody's Investors Service has assigned definitive ratings to the following notes issued by Rayo Finance Ireland (No.1) Limited -- Series 5 Notes (the "Issuer"):

Aa2 to the Series 5 Euro 421.7m Floating Rate Secured Notes due April 2021 (the "Series 5 Notes")

RATINGS RATIONALE

This is a securitisation of Spanish electricity tariff deficit receivables. The receivables consist of payments made by the Spanish Comision Nacional de Energia (the "CNE") to the electricity utility companies that funded a deficit in the regulated Spanish electricity sector in 2005 (the "2005 Tariff Deficit"). This deficit was caused by the fixing of electricity costs below their market price. The receivables consist of an amount equal to 16.47% of the total recognized amount of the 2005 Tariff Deficit.

Moody's noted that the transaction benefits from a strong legal right behind the claims. This is due to the certainty that the collection rights of the Issuer of the compensation entitlement relating to the 2005 Tariff Deficit has been enacted by a series of Spanish Royal Decrees (and further detailed in corresponding Ministerial Orders). In addition, the enactments set out an obligation on the Spanish Ministry of Industry, Tourism and Trade to include a surcharge (the "2005 Tariff Deficit Surcharge") on the regulated tariffs paid for electricity supply (the "Tariff") and for access to electricity grids (the "Access Tolls") in order to recover on a linear basis the 2005 Tariff Deficit by 10 April 2021. The effect of this, along with the details set out in relevant Ministerial Orders on the recovery mechanism of the 2005 Tariff Deficit, is that any repayment due on the 2005 Tariff Deficit which, for any reason, is not made during any year would simply result in the 2005 Tariff Deficit Surcharge for future years being increased to recoup the corresponding shortfall in order to repay the 2005 Tariff Deficit by the Final Maturity Date.

There remains, however, certain risks arising from the fact that the payments made by the CNE to the Issuer will depend on actual electricity usage (i.e. volumetric risk). Moody's notes that there is no explicit guarantee from the Spanish Government to repay the 2005 Tariff Deficit should there be insufficient amounts collected from the Spanish electricity sector during the life of the transaction to repay the 2005 Tariff Deficit in full. In addition, Moody's understands that the European Commission opened a formal investigation procedure in January 2007 to determine whether the Spanish low regulated electricity tariff system constitutes State Aid pursuant to Article 87 of the EC Treaty. Moody's understands from the transaction legal counsel that in the unlikely event that the European Commission makes a recovery order or requires the Spanish Government to change the Royal Decrees governing the recovery of the 2005 Tariff Deficit amounts, the Issuer may have a claim against the Spanish Government to recover the then outstanding 2005 Tariff Deficit amounts. Moody's is of the view that the risk to the Series 5 Notes as a result of this issue is commensurate with the ratings assigned to the Series 5 Notes.

Moody's analysis focused, amongst other factors, on:

• the high quality receivables backing the notes. The receivables that secure payments on the notes are essentially claims on the Spanish electricity system. This includes the fact that there is significant historical coverage of fixed costs compared to annual revenues of the electricity sector. As such, payments under the transactions primary rely on the ability of the Spanish electricity sector to generate sufficient revenues during the transaction horizon to repay the receivables backing the notes in full.

• an evaluation of the legal and structural features of the transaction including the true up' mechanism whereby outstanding amounts of the 2005 tariff deficit are considered when target annuities are recalculated, the pass through interest rate payable on the Notes, variable interest payment dates and the obligations of the CNE as regulator to comply with the settlement procedure laid out under primary and secondary legislations to repay the Beneficiaries.

• the maximum achievable rating in Spain as detailed below.

The highest structured finance rating achievable is the rating beyond which structural features or credit enhancement provided by any domestic party cannot mitigate the impact of severe events and the level of uncertainty surrounding such events. As stated in Moody's 17 February 2012 press release ("Moody's lowers the highest achievable structured finance ratings in Italy, Portugal and Spain following the recent sovereign rating actions"), the current maximum achievable rating is Aa2 for Spain. This reflects an increase in the probability of severe economic stress or even default, which, although in most cases extremely low, creates a level of uncertainty that is inconsistent with structured finance rating levels higher than Aa2. Specifically, the risk of very severe fiscal or macroeconomic stress scenarios emerging in which the government is led to increase significantly the tax burden on consumers; or consumers' ability to service electricity bills becomes severely impaired, creates the potential for politically motivated changes to the terms of the tariff deficit repayment mechanism underlying the transactions. The highest achievable structured finance rating in Spain may be revised further downwards if the likelihood of those events were to increase.

The principal methodology used in this rating was Moody's Approach to Rating Securities Backed by Utility Cost Recovery Charges published in March 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Other factors considered in addition to the principal methodology include the strength of the specific legislation enacted to set forth the regulatory claims and the repayment mechanisms, the creditworthiness and strategic role of key counterparties.

Moody's did not perform any cash flow analysis or simulation of stress scenarios as the rating is primarily based on the maximum achievable rating of the Spanish government and the structural features of the transaction.

The ratings address the expected loss posed to investors by the legal final maturity of the notes. In Moody's opinion, the structure allows for timely payment of interest and ultimate payment of principal with respect to the Class A notes by legal final maturity. Moody's ratings address only the credit risks associated with the transaction. Other non-credit risks have not been addressed but may have a significant effect on yield to investors.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's did not receive or take into account a third-party assessment on the due diligence performed regarding the underlying assets or financial instruments in this transaction.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Ning Loh
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Alex Cataldo
Associate Managing Director
Structured Finance Group
Telephone:+39-02-9148-1100

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service assigns definitive ratings to the notes issued by Rayo Finance Ireland (No.1) Limited -- Series 5 Notes
No Related Data.
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