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Rating Action:

Moody's downgrades CEDO and EDELWEISS EDS Notes

05 Aug 2010

London, 05 August 2010 -- Moody's Investors Service announced today it has downgraded the ratings of the following series of Equity Default Swap ("EDS") notes issued by CEDO PLC and EDELWEISS CAPITAL:

Issuer: CEDO I plc

....Series 1 Tranche A EUR 65,000,000 Asset-Backed Deferrable Floating Rate Notes due 2011, Downgraded to B2 (sf); previously on Jan 21, 2009 Downgraded to Ba1 (sf)

Issuer: CEDO Plc - Series CEDO II

....Series 2 Tranche K Non-Principal Protected Asset-Backed Fixed Rate Notes due 2011, Downgraded to C (sf); previously on Jan 21, 2009 Downgraded to Caa3 (sf)

Issuer: CEDO Plc - Series CEDO III

....Series 3 Tranche K Non-Principal Protected Asset-Backed Fixed Rate Notes due 2012, Downgraded to C (sf); previously on Jan 21, 2009 Downgraded to Caa3 (sf)

Issuer: CEDO PLC - Series 4

....Series 4 Tranche A EUR 73,100,000 Asset-Backed Deferrable Floating Rate Notes due 2012, Downgraded to Ca (sf); previously on Jan 21, 2009 Downgraded to B3 (sf)

....Series 4 Tranche B EUR 90,700,000 Asset-Backed Deferrable Floating Rate Notes due 2012, Downgraded to Ca (sf); previously on Jan 21, 2009 Downgraded to Caa1 (sf)

....Series 4 Tranche C EUR 11,200,000 Asset-Backed Deferrable Floating Rate Notes due 2012, Downgraded to Ca (sf); previously on Jan 21, 2009 Downgraded to Caa1 (sf)

Issuer: CEDO PLC - Series 4 - CSAM

....Series 4 Tranche D EUR 73,000,000 Asset-Backed Deferrable Floating Rate Notes due 2012, Downgraded to Caa1 (sf); previously on Jan 21, 2009 Downgraded to B3 (sf)

....Series 4 Tranche E EUR 47,000,000 Asset Backed Deferrable Floating Rate Notes due 2012, Downgraded to Ca (sf); previously on May 20, 2009 Downgraded to Caa2 (sf)

....Series 4 Tranche K CHF 132,000,000 Asset-Backed Deferrable Floating Rate Notes due 2012, Downgraded to Caa1 (sf); previously on Jan 21, 2009 Downgraded to B3 (sf)

....Series 4 Tranche N USD 40,000,000 Asset-Backed Deferrable Floating Rate Notes due 2012, Downgraded to Caa1 (sf); previously on Jan 21, 2009 Downgraded to B3 (sf)

Issuer: Edelweiss Capital Plc - Series 2007-1

....Class A Series 2007-1 Asset-Backed Floating Rate Notes, Downgraded to C (sf); previously on Jan 21, 2009 Downgraded to Caa1 (sf)

....Class B Series 2007-1 Asset-Backed Floating Rate Notes, Downgraded to C (sf); previously on Jan 21, 2009 Downgraded to Caa2 (sf)

Issuer: Edelweiss Capital plc - Series 2007-2

....Class D$ Series 2007-2 Asset-Backed Floating Rate Notes due 2013, Downgraded to C (sf); previously on Jan 21, 2009 Downgraded to Caa2 (sf)

....Class A€ Series 2007-2 Asset-Backed Floating Rate Notes due 2013, Downgraded to Ca (sf); previously on Jan 21, 2009 Downgraded to Caa2 (sf)

In addition, all the ratings of CEDO 1 PLC tranche A, CEDO PLC -- Series 4 tranches A,B and C, and CEDO 4 -- CSAM tranches E and K will be withdrawn shortly because the notes were bought back and terminated.

Each of these synthetic CDOs refers to a portfolio of single-name EDS on large international corporations. Each portfolio comprises between 55 and 60 EDS in the so-called "Risk Portfolio", on which the SPV is protection seller, and the same number of EDS in the so-called "Insurance Portfolio", on which the SPV is protection buyer. At maturity of the transactions, the number of Net Equity Events (i.e. the difference in number of Equity Events in the Risk Portfolio and in the Insurance Portfolio) defines the amount of loss to be paid by the SPV to the protection buyer. An Equity Event (or hit) will be recorded if the stock price reaches its predefined trigger (typically 35% of the initial price level). For each hit one-tenth of notional is lost on the corresponding reference entity if the EDS is in the "Risk Portfolio" and recovered on the corresponding reference entity if the EDS is in the "Insurance Portfolio". Due to this EDS mechanism, losses can occur even if the reference entities do not default but only experience substantial stock price movements.

Moody's says that the various rating actions taken on the seven transactions reflect its latest assessment of the evolution of the prices of the underlying stocks and the increase in the Net Equity Events ("net hits") realized to date. In particular, the downgrade to Ca or C of series CEDO Plc -- Series 2 Tranche K, CEDO Plc -- Series 3 Tranche K, CEDO Series 4 Tranche A, B, C, CEDO Series 4 -- CSAM Series E, Edelweiss Capital -- Series 2007-1 Tranche A and B and Edelweiss Capital Series 2007-2 Tranche A and D was driven by the consideration that the number of net hits realized to date is already partially or totally eroding the tranches' notionals. Moody's views any potential reversal of such erosions in the future as highly unlikely.

With respect to series CEDO 1 PLC Tranche A and CEDO Series 4 -- CSAM Series D, K and N the realized net hits are still covered by the current credit enhancement. For series CEDO 1 PLC and CEDO 4 -- CSAM tranches D, K and N it would take an additional 2 and 28 net hits respectively to generate losses on the tranches assuming no changes in the price until maturity. These correspond to a move on each stock name of more than 22% and 7% respectively in the Insurance Portfolio and to more than 31% and 10% respectively in the Risk Portfolio. Moody's analyzed historical data of S&P 500 index and considered these movements to be consistent with a B2 and Caa1 probability of occurrence respectively. The difference between the moves contemplated in the Insurance Portfolio and in the Risk Portfolio results from a stress applied to account for the difference in volatility noticed in the portfolio between the Insurance Portfolio and the Risk Portfolio.

Below is a general description of our approach to reaching today's rating decisions.

First, for each transaction, at the portfolio level, the amount of net hits is calculated as the number of hits in the Risk Portfolio minus the number of hits in the Insurance Portfolio. The barrier is then calculated for the names outstanding.

Second, for each tranche, the number of hits necessary to reach the attachment point is calculated as well as the number of hits required to reach the detachment point.

Third, for price declines of each name in the total pool of 0%, 1%, 2%,, the number of hits accumulated is calculated. Two characteristic values of price declines are identified: i) the price declined needed to reach the attachment point, and ii) the price decline needed to reach the detachment point. Moody's accounts for the potential of the "Insurance Portfolio" to offset certain losses from the "Risk Portfolio".

Finally, the probabilities of the identified price declines are derived from an analysis of historical S&P 500 return data from 1962 to 2010 by computing empirical return distributions. The return period is set to the maturity of the notes.

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.

New York
Jian Hu
MD - Structured Finance
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

London
Christophe Larpin
Asst Vice President - 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 downgrades CEDO and EDELWEISS EDS Notes
No Related Data.
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