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Rating Action:

Moody's downgrades Pegasus Funding (SME-loan ABS); continues review

 The document has been translated in other languages

21 Dec 2010

JPY91.9 billion commitment line affected

Tokyo, December 21, 2010 -- Moody's Japan K.K. has today downgraded to Ba2 (sf) from Baa2 (sf) the ratings on Pegasus Funding's Class A1 and A2 loans.

At the same time, Moody's continues its review of the ratings for possible further downgrade.

The complete rating actions are as follows:

Deal Name: Pegasus Funding

Class A1, Downgraded to Ba2 (sf) and Remains On Review for Possible Downgrade; previously on October 8, 2010, Baa2 (sf) Placed Under Review for Possible Downgrade

Class A2, Downgraded to Ba2 (sf) and Remains On Review for Possible Downgrade; previously on October 8, 2010, Baa2 (sf) Placed Under Review for Possible Downgrade

Class: A1 and A2

Issue Amount (commitment line): JPY 91.9 billion

Dividend: Floating

Issued Date: September 29, 2006

Final Maturity Date: December 11, 2014

Underlying Asset: Real estate-backed loan receivables

The commitment line was established in September 2006 and is backed by a pool of real estate-backed loans to small- and medium-sized enterprises.

A servicer -- which is other than the initial servicer -- conducts servicing and special servicing of all the loan receivables in the transaction.

RATING RATIONALE

These rating actions mainly reflect 1) Moody's view that the recovery rates for the collateral properties will remain at their current low levels or will decline further, given actual collection results and collection policies, and 2) an increase in substantial losses in the underlying receivables pool.

On October 8, 2010, Moody's placed under review for possible downgrade the ratings of the Class A 1 and A2 loans because the actual recovery rates for the collateral properties have been slightly lower than Moody's expectations. And there are expectations that the recovery rates may further decline.

Moody's monitoring of the actual results of servicing from the properties reveals that the cumulative recovery rate on the loan receivables from April 2009 to October 2010 was lower than Moody's expectation of 50-60%. Accordingly, if the remaining properties are sold at prices lower than expected or at auction, then this cumulative recovery rate may further decline.

A business plan for the properties, including expected collection amounts, is now being developed.

Moody's has been informed by the arranger of its progress and receives any relevant information, including expected collection amounts for large outstanding loans (top 50 loans), although the amounts can change as it is not yet fixed.

Loan receivables with large outstanding balances (JPY1.0 billion or more, for example) comprise a substantial portion of the pool, and the cumulative recovery rate will depend on their recovery rates.

The expected collection amount -- as provided by the arranger -- does not exceed Moody's assumptions. Therefore, the probability that the cumulative recovery rate may further increase -- and exceed Moody's expectation -- is low.

Furthermore, the arranger has explained that it will increase the pace of property sales and a certain number will be auctioned, if needed.

Sales have progressed, and the Class A1 and A2 loans have been redeemed slowly. As of November 2010, the total outstanding balance of these classes was around 80% of the amount in February 2009.

However, with the ongoing sale of the properties, uncollected loan receivables have emerged. This situation has led to a substantial decline in credit enhancement, as Moody's assumes that payments from obligors cannot be expected.

Moody's assumes that the recovery rates for the collateral properties will remain at current low levels, or decline further, given the fall in the actual recovery rates, an increase in substantial losses in the underlying receivables pool, the character of the servicing policies, and the probability that properties will be sold in a depressed market, etc.

Hence, Moody's has downgraded the Class A1 and A2 loans. In addition, Moody's continues to review the ratings for possible further downgrade because it still needs to examine the expected collection amounts and collection schedules in the new business plan. As stated, this has not yet been fixed.

Moody's will decide on the ratings after reviewing the business plan and servicing policies.

The final maturity takes place in December 2014. As of November 2010, the number of obligors in this transaction was around 100 and the number of properties around 350.

The principal methodology used in this rating was "Moody's Approach to Rating Transactions Backed by Real Estate Collateralized SME Loans in Japan" published on September 30, 2010, and available on www.moodys.co.jp. 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 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

For an explanation of the (sf) indicator, please see "Moody's Structured Finance Rating Scale" on www.moodys.com.

The principal information used to prepare the credit rating comprised Servicing Reports, Calculation Reports, etc.

Information sources used to prepare the credit rating are the following: parties involved in the ratings (the Arranger, etc.); parties not involved in the ratings (the Servicer, etc.); and confidential and proprietary Moody's information.

Measures taken to ensure the quality of this information include reviews by a third party.

Moody's considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

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.

Credit ratings are Moody's current opinions of the relative future credit risk of entities, credit commitments, or debt or debt-like securities. Moody's defines credit risk as the risk that an entity may not meet its contractual, financial obligations as they come due and any estimated financial loss in the event of default. Credit ratings do not address any other risk, including but not limited to: liquidity risk, market value risk, or price volatility. Credit ratings do not constitute investment or financial advice, and credit ratings are not recommendations to purchase, sell, or hold particular securities. No warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such rating or other opinion or information is given or made by Moody's in any form or manner whatsoever. The credit risk of an issuer or its obligations is assessed based on information received from the issuer or from public sources. Moody's may change the rating when it deems necessary. Moody's may also withdraw the rating due to insufficient information, or for other reasons.

Moody's Japan K.K. is a credit rating agency registered with the Japan Financial Services Agency and its registration number is FSA Commissioner (Ratings) No. 2. The Financial Services Agency has not imposed any supervisory measures on Moody's Japan K.K. in the past year.

Please see ratings tab on the issuer/entity page on the Moody's website 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 Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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 the Moody's website for further information.

Please see the Credit Policy page on the Moody's website for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Tokyo
Yumiko Kitaoka
Vice President - Senior Analyst
Structured Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Tokyo
Koji Kumamaru
MD - Structured Finance
Structured Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Moody's downgrades Pegasus Funding (SME-loan ABS); continues review
No Related Data.
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