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Rating Action:

Moody's downgrades EUR 191 million of SME CLO notes of Force 2

Global Credit Research - 17 Dec 2010

London, 17 December 2010 -- Moody's Investors Service announced today the following rating actions on notes issued by Force Two Limited Partnership

Issuer: FORCE TWO Limited Partnership

EUR150.2M A Notes, Downgraded to A1 (sf); previously on Oct 1, 2009 Downgraded to Aa1 (sf) and Remained On Review for Possible Downgrade

EUR12.3M B Notes, Downgraded to Baa3 (sf); previously on Oct 1, 2009 Downgraded to A1 (sf) and Remained On Review for Possible Downgrade

EUR13M C Notes, Downgraded to Ba3 (sf); previously on Oct 1, 2009 Downgraded to Baa2 (sf) and Remained On Review for Possible Downgrade

EUR11.9M D Notes, Downgraded to B2 (sf); previously on Oct 1, 2009 Downgraded to Ba1 (sf) and Remained On Review for Possible Downgrade

EUR9.7M E Notes, Downgraded to Caa1 (sf); previously on Oct 1, 2009 Downgraded to B1 (sf) and Remained On Review for Possible Downgrade

RATINGS RATIONALE

Force Two is a German SME CLO referencing a static portfolio of German profit participations ("Genussrechte") with a scheduled maturity of January 2014. Some of the 'Genussrechte' obligations in the portfolio have certain features of equity including subordination and linkage of payments to financial performance of the obligor such as interest deferral features and contingent coupon components (type A obligations). Such obligations can be written down depending on financial performance of the obligor and may extend redemption beyond the legal final maturity of the transaction which is 4 years after its scheduled maturity date. These obligations make up 26.5% of the outstanding pool. Obligations which have not redeemed at par plus accrued interest by the scheduled maturity of the transaction will be extended up to the earlier of 13 years and the date on which all payments due under the profit participation agreement have been made. If such payments have not been made before the legal maturity of the transaction in January 2018, this is likely to lead to a loss for Force Two.

According to Moody's the rating actions are driven by 1) the revision of IKB's internal rating scale and process used to assess the creditworthiness of SME borrowers and 2) deterioration in the credit quality of the pool.

Force Two has experienced EUR 5 million of defaults since the last rating action (October 2009) and is due to experience a distressed sale on a further EUR 5 million before year end which will result in a 20% cash recovery with potential for a further 20% in proceeds. All previously unpaid interest from this issuer has now been repaid. Not including this proposed sale, the principal deficiency ledger (PDL) has been reduced from EUR 5.8 million at last rating action to EUR 2.68 million in the latest investor report, dated 25 October 2010 .

In its base case, Moody's analyzed the underlying collateral pool with a stressed weighted average default probability to scheduled maturity (January 2014) of 17.7%. This is consistent with the default probability level of a B2 rating. Moody's notes that the transaction benefits from a material level of excess spread that has allowed it to substantially cure the PDL and will continue to partially mitigate the impact of potential new defaults.

In order to assess the default probabilities of each of the borrowers in the pool, Moody's relies on the internal credit scores assigned to each borrower by Equinotes Management GmbH, as Advisor to the transaction, following the IKB rating process and methodology for SME obligors. Following the recent revision by IKB of its internal credit score scale, which provides a more detailed assessment of credit risk levels, Moody's revisited its mapping to IKB credit scores i.e. the way the bank's internal credit scores are translated into Moody's idealized default probabilities. The greater conservativeness embedded in IKB's revised credit scores drives IKB internal ratings to map to higher Moody's default probabilities and therefore has a negative impact on the ratings of the notes.

Moody's has changed its approach to stressing type A obligations. At closing Moody's modelled the risk of such assets using a rating migration approach that assessed the likelihood that debtors would default on or defer fixed remunerations and/or principal payments. Instead, Moody's now applies a haircut to the coupons and extends the expected lives of such assets, with a severity reflecting the current rating of each obligor.

Moody's also incorporated information provided by the manager in the latest investor reports to account for more recent information on the performance of the underlying obligors. 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 key assumptions Moody's used were the following:

1. Default rates for these pools will likely remain at elevated levels, despite improvements in the German economy.

2. Recoveries on the subordinated loans may be close to zero in the majority of cases, particularly when the issuer files for insolvency.

Moody's notes that this transaction is subject to a high level of macroeconomic uncertainty, as evidenced by 1) uncertainties of credit conditions in the general economy and 2) the ability of the underlying obligors to refinance the subordinated bullet loans that make up the securitised pools.

Sources of additional performance uncertainties include:

1) Low portfolio granularity: The performance of the portfolio depends to a large extent on the credit conditions of a few large obligors that are rated non investment grade, especially when they experience jump to default. Due to the pool's lack of granularity, Moody's supplement its base case scenario with individual scenario analysis.

2) The additional risk presented by the interest deferral and principal write-down features for some of the assets in the pool.

3) There is the potential for elevated refinancing difficulty regarding the subordinated debt instruments in this portfolio, particularly among obligors with weaker credit quality.

The principal methodologies used in this rating were "Moody's Approach to Rating Collateralized Loan Obligations" published in August 2009, "Moody's Approach to Rating Corporate Collateralized Synthetic Obligations" published in September 2009, and "Moody's Approach to Rating CDOs of SMEs in Europe" published in February 2007.

Under this methodology, Moody's relies on a simulation based framework. Moody's therefore used CDOROMTM, to generate default and recovery scenarios for each asset in the portfolio, and then Moody's EMEA Cash-Flow model in order to compute the associated loss to each tranche in the structure.

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 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 Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes 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
Greg O''Reilly
Associate Analyst
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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

Moody's Investors Service Ltd.
One Canada Square
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SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades EUR 191 million of SME CLO notes of Force 2
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