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Rating Action:

Moody's Downgrades RMBS Notes Issued by Eurosail-UK 2007-4BL PLC

25 Nov 2008
Moody's Downgrades RMBS Notes Issued by Eurosail-UK 2007-4BL PLC

London, 25 November 2008 -- Moody's Investors Service has today downgraded nine Classes of Notes issued by Eurosail-UK 2007-4BL PLC ("Eurosail 2007-4", the "Issuer"). The affected tranches are listed below.

The rating action reflects the following aspects:

a) The potential additional costs the Issuer might incur when entering into replacement swaps or the risk associated with unhedged interest rate and foreign currency exposure arising if no replacement swaps are entered into by the Issuer;

b) The operational risk associated with the servicing and cash management currently performed by Capstone Mortgage Services Ltd; and

c) The increased portfolio loss assumption due to the worse-than-expected performance.

On 17 September 2008, Moody's placed all classes of notes (the Notes) issued by Eurosail 2007-4 on review for possible downgrade. This rating action was prompted by the bankruptcy filing and rating downgrade of Lehman Brothers Holdings Inc ("LBHI") and the rating downgrade of certain Lehman group companies which the Issuer has contractual relationships with.

Moody's notes that following the bankruptcy filing of LBHI, an event of default has occurred in the swap agreements. Consequently, Eurosail 2007-4 is currently fully exposed to interest rate risk, basis risk and foreign exchange risk until a replacement swap counterparty is found. If swap replacements are found, the transaction would have to support any costs of entering into new hedge agreements.

The unhedged exposure to the foreign exchange markets is the main driver of today's rating action, and can potentially result in higher-than-average rating volatility. In reassessing the hedging structure, Moody's has applied the same methodology used in transactions which are only partially hedged or fully unhedged. In Eurosail 2007-4, the interest rate risk assessed arises from the mismatch between the interest due under the Notes and the interest earned on the portfolio (fixed-rate loans, floating-rate loans indexed to Loan LIBOR and loans indexed to the Bank of England Base Rate). In relation to the foreign exchange exposure, Moody's has assumed that the Issuer will not enter into replacement swaps and will be exposed to the foreign exchange spot rates until maturity. Moody's has also taken into account that current foreign exchange rates are significantly less favourable for the Issuer than those entered into at closing (approximately 1.37 for the GBP/EUR exchange rate). As part of the analysis, Moody's has applied stressed assumptions for different rating levels to incorporate future volatility this Issuer will be exposed to. For example, for a Aaa- scenario Moody's has assumed that the pound sterling exchange rate will decrease from the current levels and will reach the parity with the euro in approximately 2 years time.

Other elements taken into consideration in today's rating actions are the operational risks associated with the servicing and cash management function currently performed by Capstone Mortgage Services Ltd, a wholly-owned subsidiary of LBHI. Additionally, Moody's has reviewed the portfolio performance and has determined that it is worse than expected. Therefore, Moody's has increased the loss assumption for this portfolio to 3.4%-3.6% from 2.1%-2.3% of the original portfolio balance.

The affected tranches are:

- EUR173,000,000 Class A1a Notes due September 2028, Current rating: Aaa on review for possible downgrade, downgraded to Aa3,

- GBP100,000,000 Class A1c Notes due September 2028, Current rating: Aaa on review for possible downgrade, downgraded to Aa3,

- EUR230,000,000 Class A2a Notes due June 2045, Current rating: Aaa on review for possible downgrade, downgraded to A3,

- EUR150,000,000 Class A3a Notes due June 2045, Current rating: Aaa on review for possible downgrade, downgraded to Ba1,

- GBP111,690,000 Class A3c Notes due June 2045, Current rating: Aaa on review for possible downgrade, downgraded to Ba1,

- EUR52,000,000 Class B1a Notes due June 2045, Current rating: Aa2 on review for possible downgrade, downgraded to Caa1,

- EUR55,000,000 Class C1a Notes due June 2045, Current rating: A1 on review for possible downgrade, downgraded to Caa3,

- EUR36,000,000 Class D1a Notes due June 2045, Current rating: Baa1 on review for possible downgrade, downgraded to Caa3, and

- GBP10,220,000 Class E1c Notes due June 2045, Current rating: Ba1 on review for possible downgrade, downgraded to Caa3.

- Last rating action date: 17 September 2008

Moody's ratings address the expected loss posed to investors by the legal final maturity of the notes. Moody's ratings address only the credit risks associated with the transaction. Other non-credit risks have not been addressed, but may have a significant effect on yield to investors.

Moody's monitors this transaction using the rating methodology for EMEA RMBS as described in the Rating Methodology reports "Moody's Approach to Rating UK RMBS" published in April 2005 and "Moody's Updated Methodology for Rating UK RMBS" published in November 2007. Please refer to the special report "Interest Rate Risks in UK RMBS - Moody's approach" published in October 2007 for an overview of Moody's views on interest rate risks in UK RMBS and to the Rating Methodology report "Moody's Approach to Rating Multi-Currency CDOs" published in September 2005 for an overview of Moody's views on foreign exchange risks.

Moody's will continue to monitor closely the performance of this transaction. For more information, please see Moody's research on www.moodys.com or contact Moody's Client Service Desk on (44-20) 7772 5454.

Frankfurt
Marie-Jeanne Kerschkamp
Managing Director
Structured Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Barbara Rismondo
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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