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Rating Action:

Moody's downgrades EUR 21.6m SME CLO notes of Force Two Limited Partnership

29 Nov 2013

Moody's also affirms EUR 100.6m SME CLO notes of Force Two Limited Partnership

London, 29 November 2013 -- Moody's Investors Service announced today that it has taken rating actions on the following notes issued by Force Two Limited Partnership:

....EUR11.9M Class D Notes, Downgraded to C (sf); previously on Nov 15, 2011 Downgraded to Caa3 (sf)

....EUR9.7M Class E Notes, Downgraded to C (sf); previously on Nov 15, 2011 Downgraded to Caa3 (sf)

....EUR150.2M (current balance EUR 75.3M) Class A Notes, Affirmed Baa2 (sf); previously on Nov 15, 2011 Downgraded to Baa2 (sf)

....EUR12.3M Class B Notes, Affirmed B2 (sf); previously on Nov 15, 2011 Downgraded to B2 (sf)

....EUR13M Class C Notes, Affirmed Caa1 (sf); previously on Nov 15, 2011 Downgraded to Caa1 (sf)

Force Two Limited Partnership, issued in May 2007, is a German SME cash-flow collateralized debt obligation backed by a static portfolio of German profit participations ('Genussrechte') scheduled to mature in January 2014.

RATINGS RATIONALE

Today's rating actions are driven by continued credit deterioration and low recoveries observed in the underlying pool. The deterioration is reflected in an increase in the number of defaults and its impact on the overcollateralization levels of the rated classes.

As at October 2013, defaults and insolvencies in the transaction total EUR 51.5 million, including five defaults of EUR 29.5 million on which partial paybacks of EUR 9.0 million have been received. Four obligors experienced insolvencies in a total amount of EUR 22.0 million, of which the most recent was one for EUR 11.0 million in October 2013. Five borrowers have pre-paid their aggregate borrowings of EUR 22.5 million in full, while another 5 borrowers have repaid their aggregate borrowings of EUR 22.5 million on the due date of the underlying profit participation agreements.

The current performing portion of the portfolio consists of 29 obligations amounting to EUR 118.0 million. Of these, 5 obligors with a balance of EUR 19.0 million are reported in special care management category by EquiNotes Management GmbH ('EquiNotes'), the collateral manager, and 5 obligors with a balance of EUR 16.5 million are reported in early warning category. One obligor with a balance of EUR 10 million reported in the special attention category is assessed by the portfolio manager to have sufficient liquidity and credit lines to repay its profit participation on scheduled maturity. Moody's reading of the commentary provided by the portfolio manager on special care management category leads it to conclude that these 5 obligors are almost certain to default. These obligors are loss making, have low liquidity and poor cash flows. Moody's considers the 5 obligors in the early warning category with a EUR 16.5 million balance to be risky.

In the process of determining today's rating actions, Moody's considered a number of scenarios. Assuming the full performing pool of EUR 118.0 million to be non-impaired, the overcollateralization ratios for Classes A, B, C,, D and E are 156.7%, 134.7%, 117.3%, 104.9%, and 96.6% respectively. If the 5 obligors considered almost certain to default are excluded from the performing pool, the overcollateralization ratios for Classes A, B, C , D and E reduce to 131.4%, 113.0%, 98.4%, 88.0%, and 81.0% respectively. In the former case, Classes A, B, C and D will be fully repaid, while Class E would experience a 44% loss. In the latter case, Classes A and B would be fully repaid, Class C would experience a 12% loss, and Classes D and E would experience 100% losses. Any additional defaults will worsen these losses, and may even imperil full repayment of Class B notes. For example, in the event that the 5 risky obligors with a balance of EUR 16.5 million and I obligor in the special attention all defaulted with 50% mean recoveries, Class B would suffer a 15% loss, while Classes C, D and E would suffer 100% losses.

In line with the above, Moody's considers that the current ratings of Classes A and B are well-supported by their over-collateralization metrics as above. The current rating of Class C is consistent with a 0%-10% range of estimated loss which Moody's considers to be a likely scenario. Classes D and E are highly unlikely to receive any principal payments at all, and have accordingly been downgraded.

In its analysis, Moody's assumes a 10%-15% recovery rate for defaulting obligations given the record of realized recoveries in the transaction. Overall recovery rate (including partial paybacks) on defaults and insolvencies since closing stands at 17.6%.

In reaching its ratings decisions, Moody's has incorporated the qualitative and quantitative information on individual obligors' performance provided by 'EquiNotes' as collateral manager in the latest investor report.

Moody's views the concentration risk in this transaction as very material in the light of elevated refinancing difficulties likely to be faced by an increasing number of the weaker obligors over the period to scheduled maturity.

Moody's notes that this transaction is subject to a high level of macroeconomic uncertainty, as evidenced by uncertainties of credit conditions in the general economy and the large concentration of speculative-grade debt maturing in 2014, which may create challenges for obligors to refinance.

Specific sources of additional performance uncertainties for Force Two Limited Partnership 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. The realization of higher than anticipated default rate due to the weakness of large obligors would negatively impact the ratings.

2) There is the potential for elevated refinancing difficulty particularly among obligors with weaker credit quality. The emergence of increased refinancing difficulty at the time of maturity would negatively impact the notes.

The principal methodology used in this rating was "Moody's Approach to Rating EMEA SME Balance Sheet Securitisations" published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

No cash flow analysis, sensitivity or stress scenarios have been conducted as these rating actions are based on the observed credit deterioration of the transaction portfolio and qualitative considerations.

In addition to the quantitative factors, qualitative factors are part of the rating committee considerations. These qualitative factors include the structural protections in each transaction, the recent deal performance in the current market environment, the legal environment, specific documentation features, and the potential for selection bias in the portfolio. All information available to rating committees, including macroeconomic forecasts, input from other Moody's analytical groups, market factors, and judgments regarding the nature and severity of credit stress on the transactions, may influence the final rating decision.

REGULATORY DISCLOSURES

Moody's did not receive or take into account a third-party assessment on the due diligence performed regarding the underlying assets or financial instruments related to the monitoring of this transaction in the past six months.

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Raja Jawanteswara Iyer
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Neelam S Desai
Senior Vice President/Manager
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades EUR 21.6m SME CLO notes of Force Two Limited Partnership
No Related Data.
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