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Rating Action:

Moody's downgrades EnergyOn 1 and 2, Portuguese electricity tariff deficit ABS

18 Nov 2011

Now rated at maximum achievable rating for Portuguese structured finance transactions

Paris, November 18, 2011 -- Moody's Investors Service has today downgraded to A2(sf) from A1(sf) the ratings of EnergyOn No. 1 and No. 2, which are issued by Tagus - Sociedade de Titularização de Créditos, S.A. Both asset-backed securities (ABS) transactions are backed by Credit Rights relating to the Extraordinary Deviations that arose as a result of costs incurred by EDP -- Serviço Universal, S.A. (the "Originator") during 2007 and 2008, herein refered to as electricity tariff deficit receivables. The downgrade concludes the rating review that Moody's had decided to extend after it first downgraded the transaction ratings on 15 July 2011 (see "Moody's downgrades Portuguese ABS and RMBS structured finance transactions").

RATINGS RATIONALE

Today's downgrade reflected the conclusions of Moody's review, which found that:

- The transactions are exposed to some of the economic and fiscal challenges reflected in the ratings of the government of the Republic of Portugal (Ba2, negative outlook), and are therefore subject to the maximum achievable rating (A2(sf)) that Moody's applies to other Portuguese structured finance transactions (see 15 July 2011 press release).

- The strong structural protections that limit the reliance of the transactions on the creditworthiness of a key transaction party, the collection agent, combined with the intrinsically high quality of the regulatory receivables backing the notes, are consistent with the highest achievable rating for Portuguese structured finance transactions.

--HIGH QUALITY RECEIVABLES BACKING THE NOTES

Moody's considers the nature of the assets that the notes rely on in these transactions to be of high quality. The receivables that secure payments on the notes are essentially claims on the entire electricity system in Portugal, which are guaranteed by specific laws and decrees. The specific rights relating to these receivables, as well as their specific repayment mechanisms, including the duties of the various parties including the regulator, are all defined in decree-laws and corresponding ministerial orders.

As such, payments under the transactions primary rely on the ability of the Portuguese electricity sector to generate sufficient revenues during the transaction horizon to repay the receivables backing the notes in full. In this respect, Moody's notes that the recovery of the receivables backing the notes has a limited contribution to the regulated component of end-users' electricity bills, of about 3% on an annual basis, if looking at the 2011 allowed revenues set by the regulator as an example.

--SOVEREIGN RATING LINKAGE

Moody's review has nonetheless concluded that the transaction ratings were exposed to some of the factors driving the ratings of the Portuguese government, and were therefore subject to the maximum achievable rating that Moody's applies to other Portuguese structured finance transactions. The small but rising risk of very severe fiscal or macroeconomic stress scenarios emerging in which the Portuguese government is incentivised to increase very significantly the tax burden on consumers, or in which consumers' ability to service electricity bills becomes severely impaired, creates the risk of politically motivated changes to the terms of the tariff deficit repayment mechanism underlying the transactions.

The resulting rating linkage between these transactions and the government of the Republic of Portugal means that further potential sovereign rating changes would likely result in further transaction rating changes.

--TEMPORARY PAYMENT DISRUPTION RISK AND PROTECTIONS

Moody's review has concluded that several structural mechanisms protect the transactions from the consequences of their exposure to the role of the collection agent, EDP Distribuição - Energia, S.A., which is a subsidiary of Energias de Portugal, S.A. (EDP, Baa3/P3), as potential provider of liquidity to maintain timely payments in the event of collections from the electricity system falling temporarily under the yearly target set by the regulator.

Scheduled payments in these transactions come from collections by EDP Distribuição, which is acting as the agent of the Portuguese national electricity system. The national energy services regulator, ERSE, sets the yearly allowed revenues so that its agent can make collections to cover scheduled payments under the transactions. However, if actual collections were to be lower than scheduled, for instance due to consumption being lower than in ERSE's forecast, EDP Distribuição would be responsible for advancing the shortfall from target collections and ensure scheduled payments are met.

However, Moody's review has concluded that significant structural features limit the likelihood and potential incidence of such exposure. These structural features are:

- The benefit of strong regulator support mandated by law. The regulator must ensure among other obligations that "the payment of the positive extraordinary tariff deviations to the respective holder is made on time until their full repayment." (Decree-Law no. 165/2008, of August 21 and the Ministerial Order no. 27677/2008, of September 19)

- The lack of exposure to commingling or set off risk. Should the collection agent become insolvent while holding some of the collections to be transferred to the transactions, the law has explicitly ruled out that such collections may be commingled with other funds or set off against other debts of the agent.

- The "True up" mechanism. Any payment not made according to schedule would form part of the payments reflected in the subsequent yearly allowed revenue target set by the regulator.

- The ease of substitution of the collection agent. Other private operators already have responsibility for collecting payments from the system, which makes them eligible candidates to quickly take over the role of the current collection agent, if required.

- The protection of interest payments from a collection shortfall. Should collections be under the target, these would first be applied to pay interest.

- The benefit of a liquidity mechanism embedded in the swap arrangements. Swap documents provide for the swap counterparty to advance up to three months worth of payments to the issuer in the absence of payments received from the issuer.

- The lack of exposure to electricity price increases. Payments in this transaction come from a component of end-users' tariffs that is unrelated to electricity prices.

--ASSUMPTION SENSITIVITY

Key modelling assumptions, sensitivities, cash-flow analysis and stress scenarios on the assets underlying the notes have not been updated as the downgrade has been primarily driven by an increased linkage to the Portuguese sovereign ratings. The most stressful scenario considered in Moody's analysis envisions a change to the terms of the receivables repayment mechanism, resulting from the economic and fiscal challenges reflected in the rating of the government of the Republic of Portugal. Therefore, a potential change in the rating of the Portuguese government would negatively affect the credit risk of the transactions.

Moody's rating methodology for the tariff electricity tariff deficit transactions considers the strength of the specific legislation enacted to set forth the regulatory claims and the repayment mechanisms, the creditworthiness and strategic role of the distribution grid operator, EDP Distribuição, and the creditworthiness of the key counterparties. For further information on the rating approach, please see the new issue report publicly available for these transactions on Moody's website.

List of affected securities

Issuer: (EnergyOn No. 2) Tagus - Sociedade de Titularização de Créditos, S.A.

....A Notes, Downgraded to A2 (sf); previously on Jul 15, 2011 Downgraded to A1 (sf) and Remained On Review for Possible Downgrade

Issuer: Tagus - Sociedade de Titularizacao de Creditos, S.A.

....A1 Notes, Downgraded to A2 (sf); previously on Jul 15, 2011 Downgraded to A1 (sf) and Remained On Review for Possible Downgrade

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, public information, and confidential and proprietary Moody's Investors Service information.

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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.

In addition to the information provided below please find on the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued each of the ratings.

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.

Ariel Weil
Vice President - Senior Analyst
Structured Finance Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Annick Poulain
MD - Structured Finance
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades EnergyOn 1 and 2, Portuguese electricity tariff deficit ABS
No Related Data.
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