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Rating Action:

Moody's downgrades Classes B, C, D and X of Italian non-performing loan transaction Island Refinancing S.r.l.

20 Oct 2010

Euro 200 million of Notes downgraded

London, 20 October 2010 -- Moody's Investors Service has downgraded the following Notes issued by Island Refinancing S.r.l. (the "Issuer") (amounts reflect initial outstandings):

EUR 62 million Class B - 2007 Asset-Backed Floating Rate Notes due 2025, downgraded to Baa3 (sf); previously on 4 March 2010 Baa1 (sf) placed under review for possible downgrade

EUR 60 million Class C - 2007 Asset-Backed Floating Rate Notes due 2025, downgraded to B1 (sf); previously on 4 March 2010 Ba2 (sf) placed under review for possible downgrade

EUR 32 million Class D - 2007 Asset-Backed Floating Rate Notes due 2025, downgraded to B3 (sf); previously on 4 March 2010 B1 (sf) placed under review for possible downgrade

EUR 46 million Class X - 2007 Asset-Backed Floating Rate Notes due 2025, downgraded to Ca (sf); previously on 4 March 2010 Caa2 (sf) placed under review for possible downgrade

The Class A Note ratings were not affected by today's rating action and Moody's has not assigned ratings to the Class E Notes or Class F Notes. All the ratings of the Issuer are (sf) ratings.

RATINGS RATIONALE

Today's rating review action has been prompted by the slower than expected collection rate observed in the securitised portfolio backing the Notes. The timing of collections versus the Initial Business Plan (please see the previous press release dated 4 March 2010 for more information on this and describing the transaction) determines when the Notes' interest deferral mechanism is triggered.

Interest payments can be deferred for any class of Notes provided it is not the most senior class of Notes then outstanding. The test to defer Class B Notes interest is met when on two consecutive payment dates the cumulative net collections received are less than 60.0% of the cumulative expected collections under the Initial Business Plan (the "Collection Threshold"). The Collection Threshold for the Class C Notes is 75.0%, for the Class D Notes 83.0% and for the Class X Notes it is 95%.

Interest deferral is currently occurring on all Notes except the Class A Notes. Moody's believes that there is a high probability of continuing interest deferral on the subordinated Notes for the foreseeable future. As per the structure, Noteholders which do not receive their coupon on time, will not receive interest on the missed interest. Therefore, Noteholders directly bear carry costs which contribute to increased expected losses on the affected Classes of Notes. At the same time, the amounts which are not being disbursed to Class B, C, D and X Noteholders as interest, are instead being used to turbo amortise Class A principal which is beneficial for Class A Noteholders.

The principal methodology used in rating Island Refinancing S.r.l. was "Update on Moody's Real Estate Analysis for CMBS Transaction in EMEA" rating methodology published in June 2005. Moody's also used a bond liability cash flow model, which follows the general principles of modelling cashflows as set out in "Cash Flow Analysis in EMEA RMBS: Testing Structural Features with the MARCO Model (Moody's Analyser of Residential Cash Flows)", and which incorporates additional features to model the interest payment deferral and other structural features of the Notes. 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 base case scenario assumes that net collections throughout the entire life of the transaction will be approximately 5% lower than the Initial Business Plan. The rationale for this is that the net collection scenario Moody's uses does not give any value to unsecured claims, and also it makes an allowance for potentially higher costs than anticipated by the Initial Business Plan. The reported performance over the past 5 interest periods has shown profitability of 106% on average per claim.

In terms of timing of collections, Moody's assumed in the base case that the net collection rate over the next eighteen months will remain at or around current collection levels. Thereafter, and until the final legal maturity of the Notes, Moody's has assumed that remaining aggregate net collections will be received on a roughly constant basis. Moody's modelling approach allows for variance around these levels on a probability weighted basis, and the analysis also included a review of the effects of varying the timings as well as level of overall collection levels through the remaining life of the transaction.

In the base case scenario, Classes B, C, D and X Notes will suffer increased losses when compared with modelling the Initial Business Plan or any updated business plan due to the interest deferral dynamics referred to above. Those Classes are expected to recover varying proportions of the principal invested in addition to recovering the interest deferred. Moody's believes that the Class X Notes may potentially experience significant losses. On the other hand, the Class A Notes are currently benefiting from faster than anticipated redemption, and as such the interest deferral is credit positive for those Notes.

Moody's base case in future, will be amended in light of significant changes in 1) recovery timings, 2) recovery profitability and 3) movements in Euribor. The ratings assigned currently permit some variance around Moody's base case, and as such minor changes will not in and of themselves necessarily result in a revision of the base case.

The last Performance Overview for this transaction was published on 28 September 2010. 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 6 months. Moody's was unable to form a refined view of the collections performance to date since a claim by claim analysis of the Initial Business Plan versus actual experience was not available. As a result Moody's analysis has relied on aggregate profitability to date, and has made assumptions about the estimated timing of expected collections going forwards.

REGULATORY DISCLOSURES

The rating has been disclosed to the rated entity or its designated agents and issued with no 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 considers the quality of information satisfactory in assigning the current ratings.

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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
Lisa Macedo
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Christophe de Noaillat
Senior Vice President
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service Ltd.
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Moody's downgrades Classes B, C, D and X of Italian non-performing loan transaction Island Refinancing S.r.l.
No Related Data.
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