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Fitch Affirms Red Dorsal Finance Ltd's 2015-1 Notes at 'BBB-sf'; Outlook Stable - Fitch Ratings

Fitch Ratings - Chicago - 28 Dec 2021: Fitch Ratings has affirmed the ratings of the outstanding series of notes issued by Red Dorsal Finance Limited at 'BBB-sf'. The Rating Outlook on the notes is Stable and it reflects Peru's Stable Rating Outlook.

On Oct. 15. 2021, Fitch downgraded Peru's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'BBB' from 'BBB+' and revised the Outlook to Stable from Negative. The downgrade reflects the steady erosion over time of Peru's sovereign balance sheet and other key rating metrics, as a result of a series of shocks. The coronavirus pandemic and the Peruvian government's fiscal response has helped accelerate this trend.

The Stable Outlook reflects Fitch's view that a lower growth outlook and post-pandemic social demands will challenge the administration's capacity to stabilize government debt/GDP during its term, but that this should remain within a range consistent with the credit rating currently assigned to Peru.

Red Dorsal Finance Limited

VIEW ADDITIONAL RATING DETAILS

Transaction Summary

The transaction is a U.S. dollar-denominated securitization of investment recognition payments (Retribucion Por Inversiones [RPIs]), executed by the Government of Peru (GOP) through its Ministry of Transportation and Communication (MTC). The RPIs are related to the construction and design of the fiber optic network in Peru, Red Dorsal Nacional de Fibra Optica (RDNFO). The proceeds of the issuance were used to purchase the RPIs from the Concessionaire (Azteca Comunicaciones Peru S.A.C. - ACP) and pay transaction expenses.

Fitch's ratings address the likelihood of timely payment of PI.

KEY RATING DRIVERS

Notes' Credit Quality Relies on Sovereign Guarantee: Fitch assumes that payment on the notes will completely rely on the government guarantee to make timely payment of the RPIs. Although the RDNFO construction was completed in September 2016, Fitch considers the historical information available not yet sufficient to validate the potential flows expected to be received from tariff collections.

Strength of Government Obligations Notched from Peru's IDR: The guarantee backing the RPI payments is considered an irrevocable and unconditional obligation of the GOP, through the MTC, denominated in U.S. dollars. This obligation is included in the GOP's multiyear budgetary projections with established history and legislative acceptance. Unlike Certificados de Reconocimiento de Pago Anual de Obras, this is an obligation that is governed by Peruvian law, and does not cross-default with other RPIs.

To determine the strength of the government obligation and its differentiation from the FC IDR, Fitch incorporated perspectives from its sovereign group and determined that the credit quality of the obligation is commensurate with the rating of the transaction.

No Exposure to Construction/Performance Risk: The RPI payments backing this transaction were originated once an Acta de Adjudicación de los Bienes de la Concesión (AABC) was executed. An AABC was issued upon construction completion of a partial delivery of the project, and it was independent of future completion in full of any other partial delivery in the project. Thus, the transaction was not exposed to construction risk. Furthermore, payments on the RPIs are not exposed to performance risks related to the operation and usage of the RDNFO, post-construction completion.

Rating of Notes Linked to Sovereign FC IDR: GOP's guarantee is denominated in U.S. dollars; thus, the rating reflects the likelihood of the sovereign paying such obligation in foreign currency. On Oct. 15, 2021, Fitch downgraded Peru's Long-Term (LT) Foreign-Currency (FC) Issuer Default Rating (IDR) to 'BBB' from 'BBB+' and revised the Outlook to Stable from Negative. For further information on the credit quality of the sovereign, please see Fitch's press release on Peru published on Oct. 15, 2021 and available at www.fitchratings.com.

Transaction Benefits from Adequate Liquidity: The transaction benefits from a Reserve Account (RA) funded at closing, equal to six months of debt service payments on the notes. The balance of the RA will decrease to three months of notes payments if the Project Trust Coverage Ratio (PTCR) is at least 1.5x. PTCR is calculated as the ratio of the revenues received in the 'Cuenta Ingresos Disponibles' during the previous four quarters divided by the RPI and RPMO obligations for the next four quarters.

Transaction Exposed to Political Risk: Payment of the RPIs is an obligation of the MTC. Fitch believes that the most reliable and common source of payment will be through a regular annual budgeting process. The annual budget is prepared by the Ministry of Finance and approved by the congress, exposing it to political risk, which is reflected in the rating assigned to the transaction.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

--The ratings assigned to the notes are sensitive to changes in Peru's FC IDR, as the guarantee provider on the payment of the RPIs; therefore, a Negative Rating action or Downgrade of Peru's credit quality would lead to a rating action in the same proportion on the rated notes.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

--The ratings assigned to the notes are sensitive to changes in Peru's FC IDR, as the guarantee provider on the payment of the RPIs; therefore, a positive rating action or upgrade of Peru's credit quality would lead to a rating action in the same proportion on the rated notes.

Additionally, any change in Fitch's view regarding the strength of the sovereign guarantee may affect the rating assigned to this transaction.

Best/Worst Case Rating Scenario

International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

CRITERIA VARIATION

Fitch's "Global Rating Criteria for Single- and Multi-Name Credit-Linked Notes," dated Feb. 12, 2021, establishes that the credit quality of the primary risk contributors in a credit-linked notes (CLNs) transaction is typically determined by an IDR assigned by Fitch. However, in some situations, a committee would consider using the actual bond rating (e.g., senior unsecured rating, subordinate rating) of an asset in place of the IDR.

For this transaction, it has been determined that the credit quality of the primary risk contributor is not commensurate with the IDR or any particular bond rating of the obligor, as sovereign ratings do not directly address all forms of obligations. Therefore, it was determined that the credit quality of this government's obligation is one notch below the sovereign's LT FC IDR. To determine the credit quality of the sovereign obligation, and its notching from the sovereign IDR, the agency incorporates perspectives from its sovereign group.

USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10

Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS

The ratings are linked to the credit risk of Peru as measured by its Long-Term Foreign Currency IDR.

Additional information is available on www.fitchratings.com

PARTICIPATION STATUS

The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.

ADDITIONAL DISCLOSURES

  • Dodd-Frank Rating Information Disclosure Form
  • Solicitation Status
  • Endorsement Policy

ENDORSEMENT STATUS

Red Dorsal Finance Limited EU Endorsed, UK Endorsed