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Rating Action:

Moody's downgrades 19 classes of notes issued by Eurosail 2006-1, Eurosail 2006-2BL and Eurosail 2006-3NC

23 May 2008
Moody's downgrades 19 classes of notes issued by Eurosail 2006-1, Eurosail 2006-2BL and Eurosail 2006-3NC

Approximately GBP 280.2 million of debt securities affected.

London, 23 May 2008 -- Moody's Investors Service announced today that it downgraded 19 classes of notes issued by Eurosail 2006-1 PLC ("Eurosail 2006-1"), Eurosail 2006-2BL PLC ("Eurosail 2006-2BL"), and Eurosail 2006-3NC PLC ("Eurosail 2006-3NC") the following classes of notes:

Issuer: Eurosail 2006-1 PLC

Class C1a/C1c, A2 Current Rating, downgraded to Baa2

Class D1a/D1c, Baa2 Current Rating, downgraded to Ba3

Class E, Ba1 Current Rating, downgraded to B3

Issuer: Eurosail 2006-2BL PLC

Class B1a/B1b , Aa2 Current Rating, downgraded to Aa3

Class C1a/C1c , A2 Current Rating, downgraded to A3

Class D1a/D1C, Baa2 Current Rating, downgraded to Ba1

Class E1c, Ba1 Current Rating, downgraded to B3

Class F1c, B1 Current Rating, downgraded to Caa1

Issuer: Eurosail 2006-3NC PLC

Class B1a, Aa2 Current Rating, downgraded to Aa3

Class C1a/C1c, A2 Current Rating, downgraded to Baa2

Class D1a/D1c, Baa3 Current Rating, downgraded to B1

Class E1c, Ba2 Current Rating, downgraded to B3

The rating actions were mostly prompted by worse-than-expected collateral performance and also by a certain amount of unhedged basis risk which has exposed these transactions to recent interest rate volatility above those initially modelled by Moody's. Today's rating actions take into account increased portfolio loss expectations accounting for the relatively high delinquency levels shown in the portfolio performance as well as revised assumptions for excess spread reduction due to unhedged basis risk. These three Eurosail transactions were originated by Preferred Mortgages Limited ("Preferred"), Southern Pacific Mortgage Limited ("SPML") and Southern Pacific Personal Loans Limited ("SPPL"), all part of the origination platform of Lehman Brothers International.

Eurosail 2006-1 and Eurosail 2006-2BL are performing worse than the UK nonconforming market index. At seven quarters since issuance for Eurosail 2006-1 and six quarters since issuance for Eurosail 2006-2BL, these transactions have particularly high levels of 90+ days delinquencies excluding repossessions equal to 15.30% and 13.43% of current portfolio balance respectively. The outstanding unsold repossession rate stands at 2.89% and 3.96% of current portfolio balance respectively. In the case of Eurosail 2006-1, Moody's has increased its required credit enhancement levels and adjusted its portfolio loss expectations to 3.50%-3.90% of the original balance. For Eurosail 2006-2BL, the portfolio loss expectations were changed to 3.0%-3.40% of the original balance. Eurosail 2006-1 and Eurosail 2006-2BL closed in May 2006 and October 2006. The transactions have current pool factors of 66.98% and 72.99% respectively.

In March 2008, Eurosail 2006-3NC drew on its reserve fund which is currently at 85.86% of its required level. The drawing in the reserve fund was mainly due to: 1) under-performance of the loans reflected in high delinquencies, 2) step-ups in the margin payable on the detachable coupons, and 3) non mortgage-backed notes receiving interest prior to the reserve fund. The detachable coupon has stepped up to 1.7% in the March 2008 interest payment date and it will further increase to 3% at the 12th interest payment date. The increased excess spread stripping and the interest priority on the revenue backed notes were accounted for in the initial analysis. Moody's believe that these structural features in combination with weak collateral performance may put further stress on the transaction. Under these circumstances, Moody's expects the reserve fund to continue to be drawn in the future. With respect to performance, Eurosail 2006-3NC is deviating from the UK nonconforming market index and at 24 months since issuance, delinquencies 90+ days excluding repossessions correspond to 18.89% of current portfolio balance. Outstanding unsold repossession rate is at present 2.21% of current portfolio balance, and 0.11% cumulative losses of original portfolio balance have been realised. Taking into account the current amount of realised losses and completing a roll-rate and severity analysis for the non-defaulted portion of the portfolio, Moody's has adjusted its loss expectations for this portfolio to 3.50% - 3.90% of original balance. The transaction is currently paying sequential and it will not pay pro rata unless the reserve fund is replenished to its required amount. Eurosail 2006-3NC closed in November 2006 and has a current pool factor of 73.63%.

In the case of Eurosail 2006-1 and Eurosail 2006-3NC, the collateral portfolios comprise a portion of second-ranking mortgage loans: 5.12% and 14.49% respectively as of March 2008 payment date. Today's rating action takes into account the increasing loss severity experienced in both transactions, which is expected to continue especially for second-ranking loans in the current housing environment.

Additionally, the transactions are exposed to some unhedged basis risk due to the reset date mismatch between the Note Libor and the Libor on the mortgage loans which is approximately a 10-15 day period. Recent interest rate volatility in the Libor rate has been above the levels initially modeled. The spread modeling for this rating review has taken this recent interest rate volatility into account.

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.

Please refer also to the Index report "UK-Non Conforming RMBS Q4 2007 Index" which can be found on under the Credit Index category of Structured Finance research. Please also refer to the special report "Interest Rate Risks in UK RMBS -- Moody's approach" for an overview of Moody's view on interest rate risk in UK RMBS.

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

Eli Luzac
Senior Associate
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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