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Rating Action:

MOODY'S DOWNGRADES ARES FINANCE S.R.L. AND ARES FINANCE 2 S.A., ITALIAN NON-PERFORMING LOANS ABS

22 Sep 2010

Euro 75.6 Million of Debt Securities Affected

Milan, September 22, 2010 -- Moody's Investors Service has today downgraded all outstanding classes of notes issued by Ares Finance S.r.l. (Ares 1) and Ares Finance 2 S.A. (Ares 2) (see list below).

Issuer: Ares Finance S.r.l.

....EUR17.74M E Bond, Downgraded to Caa2(sf); previously on 31 March 2010 A3 (sf) Placed Under Review for Possible Downgrade

....EUR15M F Bond, Downgraded to C(sf); previously on 31 March 2010 Baa2(sf) Placed Under Review for Possible Downgrade

Issuer: Ares Finance 2 S.A.

....EUR27.87M D Bond, Downgraded to Ca(sf); previously on 31 March 2010 Baa3(sf) Placed Under Review for Possible Downgrade

....EUR15M E Bond, Downgraded to C(sf); previously on 31 March 2010 Ba3(sf) Placed Under Review for Possible Downgrade

RATINGS RATIONALE

Ares 1 and Ares 2 are non-performing loan securitisation transactions, whose underlying collateral is composed of secured and unsecured loans originated and consequently declared as defaulted ("in sofferenza"), by Banca Nazionale del Lavoro (Aa3/Prime-1).

Today's downgrades conclude the review of both transactions, which was initiated in March 2010. Moody's has taken into consideration the markedly worse-than-expected performance of the collateral, in particular the timing of recoveries on the collateral portfolio and related uncertainty on future recoveries. For both deals, timing of recoveries has been extremely slow and cumulated collections have consistently been behind the securitisation business plans, and have further significantly slowed down in the past years.

The ratings of the Ares 1 and Ares 2 notes factor in the projected collections until legal maturity on the remaining respective portfolios as well as the amount of cash already accumulated in the issuers' respective accounts. These elements represent the key parameters used by Moody's when reviewing the ratings of the outstanding notes which resulted in the downgrade detailed above.

PROJECTED COLLECTIONS AND RELATED TIMING: For both deals, Moody's was provided with an updated data tape including all unresolved positions in the portfolio. The data tape detailed the amount of expected collections for each borrower and the timing of cash flows. Expected collections are well in excess of the outstanding amounts of the respective rated notes of Ares 1 (EUR32.74 million) and Ares 2 (EUR 42.87 million) . However, the timing of collections extends well beyond the legal maturity date of the notes, which fall in March and July 2011, respectively.

Both deals' documentation clearly states that, at final maturity date, any outstanding amount will be cancelled if the issuer has insufficient funds to fully repay the notes.

Consequently, Moody's was only able to give value to the collections the servicer expects to receive by the legal final maturity date of both transactions and could not give any value to the collections expected to come in after the legal final maturity date has passed. The rating agency further notes that EUR45.3 million (Ares 1) and EUR16.5 million (Ares 2) are expected to be received by the respective issuers on positions for which the sale of the security has already occurred (the relevant court just needs to release funds) or from positions where an out-of-court agreement with the borrower has been reached. Although the probability of cashing in such collections is high, the timing remains highly uncertain. Consequently, given the tight maturity date on both deals, Moody's was unable to give value to these figures as it is not certain they will be collected by the legal final maturity of the notes.

CASH COLLECTIONS: Cash has accumulated in the issuers' respective accounts since the last payment date. As Ares 1's next payment date falls in September, the cash sitting in Ares 1's account is EUR10 million. For Ares 2, the amount is EUR1 million given the recent payment date in July with the next payment date falling in January 2011.

Given level of information provided, Moody's has assumed that such amounts are part of the projected cash flows the servicer expects to get by the final maturity date of both deals (the projections are annually updated and last update occurred in November 2009), in order to avoid any potential double counting.

The principal methodology used in rating the Notes was Moody's Approach to Rating Structured Finance Securities in Default published in November 2009. Other methodologies and factors that may have been considered in the process of rating these Notes can also be found on Moody's website.

Hence, Moody's considers that both Ares 1 and Ares 2 notes are very likely to default at their respective final maturity date as the issuers are expected to have insufficient funds to fully repay the rated notes.

In order to size the potential loss suffered by the noteholders at legal maturity, Moody's first computed the amount of available funds that each SPV (Ares 1 and Ares 2) is expected to have as a base case at the maturity of the respective deal to pay both interest and principal on the notes. Based on the information provided by the servicer (last updated in March 2010), Moody's assumed that the issuers would have accumulated gross collections of approximately €18 million and € 11 million for Ares 1 and Ares 2 respective maturity date.

In order to derive actual funds available for servicing the debt , senior costs including servicer and issuer expenses (such as asset management fees, legal expenses, court costs) have been deducted from the expected gross collections based on the servicer updated business plan. The sizing of such costs was based on historical evidence taken from the respective investors reports published in the past three years (2008-2010) for each deal.

These available funds were then assumed to be allocated - according to the relevant Ares 1 or Ares 2 waterfall - with an estimation of EURIBOR at 1.5% (base rate on the notes) and under the assumption that the notes would not amortise before legal maturity date. Moody's then estimated the potential losses on the rated notes.

Based on this calculation, the loss on the Ares 1 Class E notes is expected to be between 20% and 10%. As Ares 1 Class F notes are junior in the waterfall, principal amount is expected to be fully lost. This results in a downgrade to Caa2(sf) from A3(sf) for the Class E notes and C(sf) from Baa2(sf) for the Class F notes.

For Ares 2 (whose legal maturity falls in July 2011), the Class D notes are expected to suffer a loss ranging between 35% and 65% of the notes, and the Class E notes principal amount is expected to be fully lost given the subordination of these notes in the waterfall. This results in a downgrade to Ca(sf) from Baa3(sf) for the Class D notes and C(sf) from Ba3(sf) for the Class E notes.

Moody's Investors Service did not receive or take into account a third party due diligence report on the underlying assets or financial instruments related to the monitoring of this transaction in the past 6 months.

REGULATORY DISCLOSURES

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

Information sources used to prepare the credit ratings are the following: parties involved in the ratings, public information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Additional research, including the pre-sale report for these transactions and reports for prior transactions, are available at www.moodys.com. In addition Moody's publishes a weekly summary of structured finance credit, ratings and methodologies, available to all registered users of our website, at www.moodys.com/SFQuickCheck

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit 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.

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

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service 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 the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Milan
Valentina Varola
Vice President - Senior Analyst
Structured Finance Group
Moody's Italia S.r.l
Telephone:+39-02-9148-1100

Paris
Carole Gintz
VP - Senior Credit Officer
Structured Finance Group
Moody's France SAS
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Italia S.r.l
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MOODY'S DOWNGRADES ARES FINANCE S.R.L. AND ARES FINANCE 2 S.A., ITALIAN NON-PERFORMING LOANS ABS
No Related Data.
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