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Rating Action:

Moody's Places on review SME CLO notes of Preps 2006-1 plc

Global Credit Research - 05 Aug 2010

EUR 260.49 debt securities affected

London, 05 August 2010 -- Moody's Investors Service announced today it has placed on review for downgrade its ratings of four classes of notes issued by Preps 2006-1 plc.

Issuer: PREPS 2006-1 plc

EUR238.1M A1 Notes, Aa3 (sf) Placed Under Review for Possible Downgrade; previously on May 21, 2009 Downgraded to Aa3 (sf)

EUR0.9M A2 Notes, Aa3 (sf) Placed Under Review for Possible Downgrade; previously on May 21, 2009 Downgraded to Aa3 (sf)

EUR40M B1 Notes, B2 (sf) Placed Under Review for Possible Downgrade; previously on May 21, 2009 Downgraded to B2 (sf)

EUR9M B2 Notes, B2 (sf) Placed Under Review for Possible Downgrade; previously on May 21, 2009 Downgraded to B2 (sf)

Preps 2006-1 is a European mezzanine finance CLO with a portfolio of subordinated loans to obligors predominantly located in Germany. The pool is concentrated with the five largest exposures comprising 22.2% of the pool. The transaction has suffered EUR 51 million in defaults (15.9% of the initial pool), EUR 6 million of which have occurred since the previous rating action as well as the recent delinquency of one issuer with a notional size of EUR 5 million. The Principal Deficiency Ledger is currently EUR 31.0 million, it was paid down by EUR 3.2 million on the last payment date in July 2010. The remaining assets in the portfolio have also suffered credit deterioration, with 27.2%, compared to 17.2% when it was last actioned by Moody's, of the outstanding portfolio now estimated to be Ba1 or below by the Riskcalc model used to assess the assets as per the investor report dated 18 July 2010.

The action relies on financial data received annually for a majority of obligors in the pool from the end of 2008. This financial data is used by Moody's in order to assess the credit quality of obligors in the pool, relying on RiskCalc, an econometric model developed by Moody's KMV. The results obtained from the Riskcalc model have been translated to Moody's rating scale and adjusted by one notch where necessary in order to compensate for the absence of credit indicators such as rating reviews, outlooks and adjustments factoring in cyclical developments in the economy.

Moody's has placed this transaction under review for possible downgrade in response to the emergence of a delinquent issuer, with a notional of five million, as well as credit migration in the underlying pool. This review will be concluded once the credit assessments on the underlying pool have been updated with obligor financial statements from 2009.

Moody's also incorporated information provided by the manager in the latest investor report to account for more recent information on the performance of the underlying obligors. Furthermore, various additional scenarios have been considered for the analysis and include the application of stresses applicable to concentrated pools with non publicly rated issuers, as outlined in Moody's Methodology, "Updated approach to the usage of credit estimates in rated transactions" (October 2009).

The deal was modeled using CDOROM 2.6 to simulate default scenarios that were then used as inputs in a cash flow model.

Moody's initially analyzed and continues to monitor this transaction using primarily the methodology and its supplements for cash flow CLOs as described in Moody's Special Reports and press releases below:

--Moody's Approach to Rating Corporate Collateralized Synthetic Obligations (March 2009)

--Moody's Approach to Rating CDOs of SMEs in Europe (February 2007)

This report can be found at www.moodys.com in the Research and Ratings directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating these issuances can also be found in the Ratings Methodologies subdirectory. 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.

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

London
Greg O''Reilly
Associate Analyst
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom

Moody's Places on review SME CLO notes of Preps 2006-1 plc
No Related Data.
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