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Rating Action:

Moody's affirms the rating of UK ABS notes issued by Bakethin Finance PLC

14 Feb 2014

London, 14 February 2014 -- Moody's Investors Service has today affirmed the A2 (sf) rating on the notes issued by Bakethin Finance PLC. At the same time, the rating agency confirmed the notes' underlying rating of A3 (sf) following a detailed analysis of the transaction's exposure to swap counterparty risk.

Today's rating action concludes the review of the underlying rating in this transaction, which Moody's placed on review on 14 November 2013, in relation to swap counterparty exposure. This followed the introduction of the rating agency's updated approach to assessing swap counterparty linkage in structured finance transactions (https://www.moodys.com/research/Moodys-reviews-for-downgrade-EMEA-RMBS-and-ABS-transactions-due--PR_286515).

The transaction is a securitisation of annual sums payable to Northumbrian Water Ltd. (NWL; Baa1 stable) by the UK Environmental Agency (EA; not rated) for the continued maintenance and operation of the Kielder Reservoir. The notes benefit from an unconditional and irrevocable guarantee of principal and interest by Assured Guaranty (Europe) Ltd. (A2 stable).

See towards the end of this press release, before the regulatory disclosure section for a detailed list of affected ratings.

RATINGS RATIONALE

Today's rating confirmation reflects the fact that the transaction's exposure to the swap counterparty has no impact on the notes' underlying rating. The swap counterparty is Belfius Bank SA/NV (Belfius; deposits Baa1 stable, bank financial strength rating D-/baseline credit assessment ba3 stable).

As part of its review, Moody's has assessed the risk of additional losses on the notes if the notes were to become unhedged following a swap counterparty default. The annual sum payable to NWL increases with the inflation rate (based on the Retail Price Index, or RPI) over the life of the contract, but the notes pay a fixed interest rate of 5.88%. In order to hedge the risk of additional losses, the transaction includes a swap agreement with Belfius, under which the issuer pays the RPI-linked annual sums and receives an amount that increases annually at a fixed rate.

To protect the transaction against a potential deterioration in Belfius's credit quality, the swap agreement contains provisions for swap counterparty replacement, if Belfius's rating falls below A3. However, this trigger was waived, and Belfius is still the swap counterparty despite its Baa1 rating. If Belfius defaults, then the transaction may become unhedged. However, Moody's has determined that the risk of the transaction becoming unhedged has no material impact on the expected loss of the underlying rating, even though it may moderately increase the probability of default. This is because the notes benefit from a recourse on NWL, which has committed to refinancing the debt on a corporate basis if, at any point in time, the funds available to the transaction are not sufficient to cover the notes' scheduled principal and interests payments.

In Bakethin Finance PLC, transaction payments are primarily exposed to the performance of NWL but also benefit from a strong security package. For this reason, our underlying rating is one notch above the rating of NWL. The methodology used for the underlying rating considers (1) the credit quality of NWL, on which the transaction has ultimate recourse through a backup refinancing pledge; (2) the strength of the EA as primary obligor of the securitised contract; and (3) the assignability of the maintenance obligations of NWL under the securitised contract if NWL is unable to perform.

As the notes are guaranteed by a financial guarantor, Moody's methodology used in this rating considers the highest of the underlying rating and the rating of the guarantor.

The principal methodology used in this rating was "Rating Transactions Based on the Credit Substitution Approach: Letter of Credit-backed, Insured and Guaranteed Debts" published in March 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

Downward pressure on the underlying rating would develop following a deterioration in the credit quality of NWL and/or a multi-notch deterioration in the credit quality of Belfius.

Upward pressure on the underlying rating would develop following a improvement in the credit quality of NWL.

Downward pressure on the rating would develop following (1) a deterioration in the credit quality of Assured Guaranty; and/or (2) a deterioration in the underlying rating if the guarantor's rating becomes lower than the underlying rating.

Upward pressure on the rating would develop following an improvement in the credit quality of Assured Guaranty and/or an improvement in the underlying rating.

LIST OF AFFECTED SECURITIES

Issuer: Bakethin Finance PLC

....GBP248M A Bond, Affirmed A2 (sf); previously on Jan 22, 2013 Downgraded to A2 (sf)

........Underlying Rating: Confirmed at A3 (sf); previously on Nov 14, 2013 A3 (sf) Placed Under Review for Possible Downgrade

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions of the disclosure form.

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 related to the monitoring of this transaction in the past six months.

Moody's did not use any models, or loss or cash flow analysis, in its analysis.

Moody's did not use any stress scenario simulations in its analysis.

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain 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 certain 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Frederic Lautard
Analyst
Structured Finance Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Carole Gintz
Senior Vice President/Manager
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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 affirms the rating of UK ABS notes issued by Bakethin Finance PLC
No Related Data.
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