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Rating Action:

Moody's downgrades CMBS Notes issued by Colligo Funding Limited

22 Nov 2010

The Notes remain on review for further possible downgrade

London, 22 November 2010 -- Moody's Investors Service has today downgraded to A3 and maintained on review for possible downgrade the following classes of notes issued by Colligo Funding Limited (the "Issuer", amounts reflecting initial outstandings):

US$1324.78M Class A1 Notes, Downgraded to A3 (sf) and Remains On Review for Possible Downgrade; previously on Dec 21, 2009 A1 (sf) Placed Under Review for Possible Downgrade

US$1324.78M Class A2 Notes, Downgraded to A3 (sf) and Remains On Review for Possible Downgrade; previously on Dec 21, 2009 A1 (sf) Placed Under Review for Possible Downgrade

US$1324.78M Class A3 Notes, Downgraded to A3 (sf) and Remains On Review for Possible Downgrade; previously on Dec 21, 2009 A1 (sf) Placed Under Review for Possible Downgrade

Moody's has not assigned a rating to the Subordinated Commercial Mortgage Backed Variable Rate Notes due 2027 ("Subordinated Notes"). All the ratings of the Issuer are (sf) ratings.

RATINGS RATIONALE

Today's rating action follows the review for possible downgrade of the Class A1, Class A2 and Class A3 Notes ("Senior Notes") initiated on 21 December 2009 and incorporates (i) Moody's assessment of the degree of credit linkage of the Senior Notes to Anglo Irish Bank Corporation Limited ("Anglo Irish") (senior debt rating: Baa3 on review for possible downgrade/P-3 on review for possible downgrade/E), (ii) a comprehensive review of the credit quality of the underlying commercial real estate loans, and (iii) realised as well as expected deleveraging of the Senior Notes as a result of loan removals by Anglo Irish, the proceeds of which pay down the Senior Notes on a fully sequential basis.

Moody's analysis reflects a forward-looking view of the likely range of collateral performance over the medium term in addition to Moody's assessment of the credit-quality of Anglo Irish in light of the inherent credit-linkage of the Senior Notes to Anglo Irish. From time to time Moody's may, if warranted, change these expectations. Collateral performance that falls outside of Moody's expectations as it translates into Moody's expected loss from the portfolio as well as a change to the current senior debt and bank deposit ratings of Anglo Irish (explained in detail below) may result in further rating action.

The downgrade of the Senior Notes reflects Moody's opinion that the notes are, to some extent, linked to the credit quality of Anglo Irish in light of the rating trigger breaches in the transaction and the proposed remedies by Anglo Irish. In Colligo Funding Limited, a CMBS transaction backed by USD denominated loans, Anglo Irish is involved as originator, servicer, borrower-level interest rate swap counterparty, issuer-level interest rate swap counterparty, liquidity facility provider, account bank and lender of further advances (please see Moody's press release from 30 September 2010 for detailed information on trigger breaches).

Moody's believes that credit-linkage to Anglo Irish will remain for the Senior Notes mainly due to (i) the possibility that Anglo Irish may not find a replacement swap provider or a guarantor for its obligations under the issuer-level interest rate swap agreement, and instead only post the required collateral under the swap agreement and (ii) Anglo Irish's intention to keep the Bank Account with Anglo Irish and benefit from the guarantee provided by the Government of Ireland (Aa2 on review for possible downgrade, P-1) under the Eligible Liabilities Guarantee (ELG) Scheme. Anglo Irish's bank deposits which benefit from the ELG Scheme are currently rated A3/P-1, on review for possible downgrade by Moody's. As will be explained in detail below, Moody's took into account in its analysis that a significant amount of cash (46% of the total Senior Note balance as per September 2010) is currently deposited with Anglo Irish as Issuer security, and is to be used to repay the Senior Notes over the next four interest payment dates.

The review for possible downgrade of the Senior Notes is maintained due to the rating sensitivity of the notes to the rating of Anglo Irish with the bank's senior debt ratings (Baa3/P-3) and long- and short-term deposit ratings (A3/P-1) being on review for possible downgrade. Moody's is of the opinion that the contemplated amendment by Anglo Irish to the Bank Account Agreement in the transaction would achieve a temporary solution as Moody's understands that the explicit guarantee provided by the Irish government expires at the end of December 2010 is expected to be extended to end of June 2011. The review action also takes into account the fact that Anglo Irish retains the primary servicing function in the transaction in spite of the breach of the Baa2 rating trigger, the remedy for which was Anglo Irish's reasonable efforts to enter into a new or stand-by servicing agreement. Anglo Irish intends to amend the agreement to replace the existing Baa2 rating trigger with a Baa3 rating trigger.

With respect to the rating trigger breaches related to the loans with borrower-level interest rate swaps and Anglo Irish's obligations to fund further advances, the Servicer has confirmed that Anglo Irish has posted the required collateral amounts in an account at Anglo Irish under the Issuer's name. Moody's is currently awaiting confirmation that a stand-by draw of the liquidity facility is carried out which Moody's understands will be deposited with Anglo Irish.

Focusing on the performance of the loan collateral, in Moody's view, the credit quality of the loan portfolio has significantly weakened when compared to its analysis as of the tap issuance and restructuring of the transaction in February 2009. The main drivers for the deterioration include: (i) substantially reduced property values observed in the United States ("US") property markets to date from peak levels in 2007 and from Moody's adjusted values as of the tap issuance, (ii) Moody's expectations regarding future property value performance and (iii) the increased refinancing risk of all loans securitised in the portfolio given the increased loan-to-value ratio ("LTV") of the loans expected at their maturity dates and the state of the commercial real estate lending environment in the US.

Following a detailed re-assessment of the loan and property portfolio's credit risk, Moody's anticipates that a very large portion of the portfolio will default over the course of the transaction term. Coupled with the negative impact of substantially reduced property values, Moody's loss expectations have significantly increased.

Moody's portfolio analysis was based on a re-assessment of (i) the underlying properties securing the mortgage loans; (ii) the characteristics of the portfolio; and (iii) structural features of the transaction. Same as in its initial analysis, Moody's derived the ratings of the Senior Notes by applying its Moody's Real Estate ("MoRE") Analysis model.

In its review, Moody's especially concentrated on the top ten loans in the portfolio accounting for on aggregate 47% of the current portfolio balance as of September 2010. For all loans in the portfolio, Moody's revised its assumptions of property cash flows and model values which resulted in a re-assessment of the default probability of the loans; both during the term of the loans on an annual basis (term default probability rating equivalent) and at the maturity date (refinance default probability rating equivalent).

Moody's cash flows used in its modelling currently reflect a weighted average ("WA") haircut of 14% to the most recently available net operating income for the loans. Moody's has assumed effective value declines on the portfolio since the peak of the market in 2007, which has increased both the default risk assessment as well as loss severity of the remaining loans in the pool. It should be noted that approximately 63% of the portfolio by underwriter's ("UW") market value have appraisal valuations dated in 2007. Moody's estimates that the UW values of the properties securing this transaction have declined on average by approximately 42% to date. This compares with Moody's value adjustment to the UW property values of 25% on a WA basis across the portfolio, as of the tap issuance. Moody's revised value adjustment is slightly lower than the 45% value decline from the October 2007 peak values measured by the Moody's/REAL Commercial Property Price Index as published in October 2010. Based on the above property value assessment, Moody's estimates that the WA securitised LTV of the portfolio is 119%.

The transaction's exposure to loans maturing in the short term is considerable. Based on the latest reported maturity dates for the loans, approximately 17% of the pool matures in the remainder of 2010, 12% in 2011 and 30% in 2012. Looking ahead, Moody's does not expect substantial property value recovery to occur prior to these maturities. Given the expected value path and taking into consideration that there is limited amount of scheduled amortisation across the portfolio (loans representing 76% by balance are structured as interest only), all loans will be still highly leveraged at their respective maturity dates. Consequently, in Moody's view, for all of the loans, the default risk at maturity has increased substantially compared to its analysis at the tap issuance.

Moody's notes that as per end of October 2010, the watchlist of the master servicer included eleven loans (11% of the portfolio), the majority of which were on the watchlist due to near term maturity dates (not all loans with maturity dates in 2010 were included on the watchlist). However, there were no loans in special servicing and no loans were reported as delinquent on debt service payments as of the end of October 2010. Moody's understands that the currently non-existent delinquency rate in the portfolio is a direct result of Anglo Irish actively re-purchasing troubled loans from the portfolio.

Since the tap issuance and restructuring of the transaction in February 2009 until September 2010, 36 loans amounting to 39% of the initial Loan portfolio have been re-purchased from the portfolio by Anglo Irish with the proceeds being used to redeem the Senior Notes on a fully sequential basis. As a result of loan repayments, the balance of the Senior Notes reduced to USD 2.49 billion as per the September 2010 interest payment date ("IPD") from USD 3.97 billion as of the tap issuance. In the same time frame, the credit enhancement level available to the Senior Notes increased to 35.4% from 24.5%.

Taking into account (i) the total principal proceeds of USD 415 million in the Issuer's accounts (as of end of September 2010) available for distribution to the Class A1 and Class A2 Notes on their respective payment dates and (ii) the New Loans Funds of USD 479 million which has not been used to acquire new loans into the structure within the permitted time frame and which is now deemed principal proceeds available to repay the Senior Notes, the effective subordination for the Senior Notes increases to 45.8%.

Moody's has been notified of four more loans (USD 248 million) which Anglo Irish has re-purchased as of 17 November 2010 and a further four loans (USD 572 million) for which Anglo Irish has served notice to re-purchase from the portfolio by end of December 2010. Therefore, the Senior Notes are expected to be redeemed by a further USD 820 million by May 2011.

In Moody's opinion, the increased subordination level available for the Moody's rated Senior Notes along with a substantial amount of cash that is in the Issuer's accounts sufficiently mitigates against the significant increase in the expected losses from the portfolio. However, in Moody's view, as explained earlier, the Senior Notes are to some extent linked and sensitive to the ratings of Anglo Irish which has resulted in today's rating action on the notes.

Primary sources of assumption uncertainty in relation to Moody's analysis on the collateral are the current stressed macroeconomic environment and continuing weakness in the US commercial real estate and lending markets. Moody's currently views the US commercial real estate market as stressed with further performance declines expected in the industrial, office, and retail sectors. Hotel performance has begun to rebound, albeit off a very weak base. Multifamily has also begun to rebound reflecting an improved supply / demand relationship. The availability of debt capital is improving with terms returning towards market norms. Job growth and housing price stability will be necessary precursors to US commercial real estate recovery. Overall, Moody's central global scenario remains "hook-shaped" for 2010 and 2011; we expect overall a sluggish recovery in most of the world's largest economies, returning to trend growth rate with elevated fiscal deficits and persistent unemployment levels.

The principal methodologies used in this rating were "Update on Moody's Real Estate Analysis for CMBS Transaction in EMEA" published in June 2005, and "Moody's Updates on its Surveillance Approach for EMEA CMBS" published in March 2009. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website. 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 prior full review is summarized in a Press Release dated 10 February 2009. Please see the ratings tab on the issuer / entity page on moodys.com for the last rating action and the ratings history.

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 six months.

REGULATORY DISCLOSURES

The rating has been disclosed to the rated entity or its designated agents and issued with amendment resulting from that disclosure.

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purpose 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.

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.

London
Deniz Yegenaga
Analyst
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

New York
Andrea M. Daniels
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service Ltd.
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Moody's downgrades CMBS Notes issued by Colligo Funding Limited
No Related Data.
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