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Rating Action:

Moody's downgrades Irish RMBS notes issued by Emerald Mortgages No. 5

Global Credit Research - 25 Feb 2011

London, 25 February 2011 -- Moody's Investors Service announced today that it has downgraded the ratings of the Class A notes and withdrawn the ratings of the Class B notes issued by Emerald Mortgages No.5 Limited.

....EUR2375M A Notes, Downgraded to A1 (sf) and Remains On Review for Possible Downgrade; previously on Oct 14, 2010 Aaa (sf) Placed Under Review for Possible Downgrade

....EUR125M B Notes, Withdrawn (sf); previously on Oct 14, 2010 Baa3 (sf) Placed Under Review for Possible Downgrade

RATING RATIONALE

On February 11 2011, Moody's announced that top-rated notes of Irish RMBS transactions would suffer multi-notch downgrades as a result of rating actions taken on most of the Irish bank ratings. Today's rating action takes into consideration the worse-than-expected performance of the collateral, the weakened macro-economic environment in Ireland, the deterioration in the credit strength of EBS as key counterparty and the recent restructuring of the transaction.

Portfolio expected loss: Moody's has reassessed its lifetime loss expectation for the pool taking into account the collateral performance to date as well as the current macroeconomic environment in Ireland. The share of loans more than 90 days in arrears has increased to 8.5 per cent as at February 2011, compared to 5.0 per cent in February 2010. The share of 360 days delinquent loans has more than doubled from 1.3 per cent to 2.9 per cent over the same period. Moody's believes the weakening of Irish economic conditions and in particular the effects of further government austerity measures will continue to negatively impact borrowers' ability to perform their financial obligations. As a result we expect arrears levels in the portfolio to continue to increase through 2011 and to remain at elevated levels for several years. On this basis we have doubled our previous portfolio expected loss assumption to 4.8 per cent of the original pool balance, 6.0 per cent of the current pool balance.

Stress scenarios: Moody's has assessed the loan-by-loan information to determine the MILAN Aaa Credit Enhancement (CE) and has increased the assumption to 30 per cent. The A1 (sf) rating of the Class A notes also incorporates additional stress scenarios, which have been analysed by Moody's to take into account systemic country risk and the impact of a sovereign and banking stress in Ireland. In its analysis, Moody's considered the likely performance of the transaction in the context of a severe stress scenario that assumes combinations of a restructuring of the government's debt, a banking system crisis, and a more severe version of the current austerity plan. The loss to the portfolio in such an extreme scenario was assumed to be approximately 20 per cent and credit enhancement of the A1 (sf) rated senior notes was assessed to ensure that these notes would not experience a loss in such a scenario.

Operational risk: on February 11 2011, the senior unsecured rating of EBS was downgraded to Ba2 and remains on review for further possible downgrade. EBS performs several key roles in the transaction including that of servicer and cash manager. EBS has taken a number of steps (see below) to mitigate the operational risk to the transaction. Deutsche Bank AG, London Branch, has been appointed as back-up cash manager. The revised transaction documents also contain a requirement for EBS, on a best efforts basis, to appoint a back-up servicer within 60 days. Other key roles such as issuer account bank, swap counterparty and liquidity facility provider have either been terminated or transferred to third parties.

The Class A Notes remain under review for possible further downgrade pending the appointment of a back-up servicer. Moody's will assess the strength of the back-up arrangement, when appointed. Should the arrangement be deemed weak, or if no back-up is appointed within the required period, then the ratings of the Class Notes will most likely be downgraded to A3.

Class B rating:

Moody's Investors Service has withdrawn the credit rating for its own business reasons. Please refer to Moody's Investors Service's Withdrawal Policy, which can be found on our website, www.moodys.com.

The rating addresses the expected loss posed to investors by the legal final maturity of the notes. In Moody's opinion, the structure allows for timely payment of interest and principal with respect of the notes by the legal final maturity. Moody's ratings only address the credit risk associated with the transaction. Other non-credit risks have not been addressed, but may have a significant effect on yield to investors.

The principal methodologies used this rating were: The Lognormal Method Applied to ABS Analysis published in September 2000, Moody's MILAN Methodology for rating Irish RMBS published in April 2009, A Framework for Stressing House Prices in RMBS Transactions in EMEA published in July 2008 and Cash Flow Analysis in EMEA RMBS: Testing Structural Features with the MARCO Model published in January 2006.

Moody's Investors Service did not receive or take into account a third party due diligence report on the underlying assets or financial instruments in this transaction.

RESTRUCTURING OVERVIEW

On the February 23 2011, the transaction documents were amended to incorporate the following main changes:

1. The issuance of a new EUR358,033,007.94 Class Z loan ranking junior in the waterfall. The proceeds of this issuance will be used to fund a partial redemption of the Class A Notes. The additional credit enhancement provided by this note together with the Class B Notes and the partial redemption increases the current Class A note subordination to approximately 24 per cent.

2. The Reserve Fund has been reduced to 1.5 per cent of total note balance and Class Z loan as at the restructure date. The revised transaction documents allow it to be reduced further, to minimum of 1 per cent, when the clearing accounts are moved to a P-1 rated bank. Apart from this one-off reduction the reserve fund will be non-amortising. Once the expected transfer has occurred, and the reserve fund reduced, the total Class A credit enhancement will be approximately 25 per cent.

3. The Class A and Class B coupons have been changed to fixed rates of 1.75 per cent and 0.25 per cent respectively. The new Class Z loan will also have a fixed coupon of 0.25 per cent

4. The priority of payments have been amended such that the reserve fund is now more senior in the waterfall, replenished after the Class A principal deficiency ledger. In addition Class B and Class Z interest payments are subordinated, ranking after the Class B and Class Z principal deficiency ledgers respectively as long as any Class A note is outstanding and ranking before otherwise.

5. An artificial write-off mechanism has been incorporated into the transaction. For any loan 12 months or more in arrears, defined as arrears amount divided by scheduled instalment, the outstanding loan balance will be debited in full to the principal deficiency ledger. Any recoveries on such loans flow through the revenue waterfall and are therefore available, along with any excess spread, to clear the written-off amount. At the date of the restructure approximately 2.9 per cent of loans are 12 months or more in arrears therefore generating an immediate principal deficiency ledger balance, it is estimated this will take approximately 14 months to clear assuming current levels of excess spread continue.

6. The Liquidity Reserve and Liquidity Facility have been cancelled and repaid by the Issuer.

7. The interest rate swap agreement has been cancelled. In order to help mitigate the potential mismatch between interest payments received on the mortgage loans, which are generally floating rate, versus interest payments due on the notes, which are all fixed rate, EBS has covenanted to maintain a minimum standard variable rate of at least 1.50 per cent

8. The issuer accounts have been transferred from EBS to Ulster Bank Ireland Limited (A2 / P-1)

9. Deutsche Bank AG (Aa3 / P-1), London Branch, had been appointed as a back-up cash manager

10. Estimation language has been included in the cash management agreement. In the event that the servicer is unable to provide certain information, the Cash Manager will base its calculations on the information provided in the three previous collection periods in order to make waterfall payments

11. Back-up Servicer to be appointed. No back-up servicer is appointed as at the restructure date, however the transaction documents have been amended to require EBS, on a best efforts basis, to appoint a back-up servicer within 60 days.

12. TMF Administration Services Limited has been appointed as replacement servicer facilitator. It is responsible, on a best efforts basis, to appoint a replacement servicer in the event that the then active servicing agreement is terminated

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, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

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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.

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London
Anthony Parry
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Neal Shah
MD - Structured Finance
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
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JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Irish RMBS notes issued by Emerald Mortgages No. 5
No Related Data.
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