Fitch Affirms Taboada Finance Limited Sr. Secured Notes; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the ratings on notes issued by Taboada Finance Limited, a special purpose company incorporated in the Cayman Islands. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

-- Reliance on Sovereign Guarantee: While the transaction benefits from collections of the underlying utility bills, the rating relies on a guarantee from the Government of Peru (GOP) on the RPI payments given SEDAPAL's ability to issue more debt from its master trust as long as the minimum debt service coverage ratio (DSCR) is 1.1x. GOP will guarantee the RPI payments related to the construction of the Taboada project if water utility bill payments received by SEDAPAL through the banking system are not sufficient to cover debt service.

-- Strength of the Government Obligation: The guarantee backing the RPI payments from SEDAPAL is considered an irrevocable and unconditional obligation of the GOP to be denominated in Nuevos Soles. This obligation is included in the GOP's multiyear budgetary projections, with an established history and legislative acceptance. Unlike CRPAOS, these are governed by Peruvian Law, do not cross-default with other RPIs, and are exposed to budgetary risk. GOP has made all payments on a timely basis since 2008 when they were first used to finance infrastructure projects.

-- No Exposure to Construction/Performance Risks: Government guarantee backing the RPI payments is not subject to the completion of further milestones or performance of the project. As of February 2014, all of the CAOs related to the construction of the project have been recognized.

-- Rating Linked to Sovereign Local Currency IDR: GOP's guarantee is denominated in Peruvian Nuevos Soles, thus the rating reflects the likelihood of the sovereign paying such obligation in local currency. On Sept. 29, 2016, Fitch affirmed Peru's Long-Term Local Currency Issuer Default Rating (IDR) at 'A-'/Stable Outlook.

-- Adequate Liquidity: The transaction structure includes liquidity mechanisms through (i) debt service reserve accounts (DSRAs), at both project trust and issuer trust level, and (ii) an Inflation Reserve Account, funded with the notes proceeds on the closing date, to help mitigate liquidity risks and to cover IPM/IPC mismatches. At issuer level the DSRA equals nine months of RPI-CAO payments, while at the project trust level it is equal to four months of RPI-CAO payments. The inflation reserve account covers the mismatch between the IPM index used to adjust RPI payments and the IPC index used in the calculation of the IRD/VAC (to which the coupon is linked). To date, account balance is S/.32.4 million (vs. the initial amount of S/.34 million

-- Criteria Variation: Fitch's "Global Rating Criteria for Single- and Multi-Name Credit-Linked Notes", dated March 8 2016, 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. To determine the credit quality of the sovereign obligation, and its notching from the sovereign IDR, the agency incorporates perspectives from its sovereign group.

RATING SENSITIVITIES

The ratings on the transaction are subject to changes in Peru's long-term LC IDR.

DUE DILIGENCE USAGE

No third-party due diligence was provided to or reviewed by Fitch in relation to this rating action.

Fitch has affirmed the following ratings:

--Series 2011-1 S/.572,089,000 notes due 2029 at 'BBB+';

--Series 2011-2 S/.220,250,000 notes due 2033 at 'BBB+';

--Series 2011-3 S/.59,133,000 notes at 'BBB+.

The Rating Outlook is Stable.

Sources of Information:

In addition to the sources of information identified in the master criteria, this action was additionally informed by the trustee.

Additional information is available at www.fitchratings.com.

Applicable Criteria

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 01 Sep 2016)

https://www.fitchratings.com/site/re/886006

Global Rating Criteria for Single- and Multi-Name Credit-Linked Notes (pub. 08 Mar 2016)

https://www.fitchratings.com/site/re/878513

Global Structured Finance Rating Criteria (pub. 27 Jun 2016)

https://www.fitchratings.com/site/re/883130

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013257

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013257

Endorsement Policy

https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Andres de la Cuesta
Associate Director
+1-312-606-2330
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Committee Chairperson
Greg Kabance
Managing Director
+1-312-368-2052
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Andres de la Cuesta
Associate Director
+1-312-606-2330
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Committee Chairperson
Greg Kabance
Managing Director
+1-312-368-2052
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com