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Rating Action:

Moody's downgrades Portuguese ABS and RMBS structured finance transactions

15 Jul 2011

Approximately €29.8 Billion of Debt Securities Affected

Madrid, July 15, 2011 -- Moody's Investors Service has today downgraded the ratings of 18 tranches of 13 Portuguese asset-backed securities (ABS) and 95 tranches of 29 residential mortgage-backed securities (RMBS) transactions. 12 ABS tranches from 7 ABS deals remain on review for possible downgrade. Moody's has also placed on review the Aaa(sf) rating of an ABS tranche guaranteed by the European Investment Fund (Aaa) as the benefit of the guarantee may be conditional to the performance of transaction parties.

Today's rating actions follow 1) Moody's decision to downgrade the Portuguese government's debt rating to Ba2 from Baa1 on 4 July 2011; 2) Moody's revision of the key collateral assumptions for Portuguese receivables; and 3) the ongoing rating review initiated on 9 June 2011 of Portuguese banks that are key transaction parties in Portuguese structured finance transactions.

Full rating details, key collateral assumptions, credit enhancement levels and key drivers of the senior notes ratings for each transaction are detailed in the separate data supplement:

- ABS: http://moodys.com/viewresearchdoc.aspx?docid=PBS_SF255447

- RMBS: http://moodys.com/viewresearchdoc.aspx?docid=PBS_SF255448

LTR Finance 5 is not affected by this rating action as the originator has announced publicly that it will redeem the transaction on 26 July 2011.

For Caravela SME No. 1, the originator is proposing to restructure the transaction by introducing an independent cash manager and increasing the credit enhancement. Moody's does not take action on this transaction at this time. However, all classes of notes remain on review for possible downgrade pending implementation of restructuring proposal .

RATINGS RATIONALE

- HIGHEST RATING FOR MOST PORTUGUESE STRUCTURED FINANCE TRANSACTIONS IS A2(SF)

Moody's no longer expects most Portuguese structured finance transactions to retain or achieve a rating higher than A2(sf), which is six notches above the government's rating. This determination reflects the weaknesses in the Portuguese economy and in the government's balance sheet, which together with the changes in the euro area support framework prompted Moody's recent multi-notch downgrades of the Portuguese government's rating. These weaknesses include poor economic growth prospects exacerbated by planned austerity measures, deterioration in the sovereign and local banks' creditworthiness, and highly uncertain market refinancing conditions. We have discussed the relationship between sovereign ratings and structured finance ratings in "Assessing the Impact of the Eurozone Sovereign Debt Crisis on Structured Finance Transactions" Moody's Special Report April 2011. The highest rating achievable for most Portuguese structured finance transactions reflects the rating level beyond which structural features or credit enhancement cannot fully mitigate the impact of severe events and the level of uncertainty around them.

The weak economic environment and the fragility of Portugal's fiscal situation have increased risk for structured finance transactions. The difficult economic environment will impair the debt repayment capacity of individuals and SMEs. The fragile fiscal situation has resulted in a targeted deficit reduction to 3% by 2013 from an actual deficit of 9.1% in 2010, as projected in the EU-IMF program. This reduction will lead to a cut in public spending, an increase in taxes, and efforts to increase tax compliance in the context of weak economic growth, all of which hurt obligor performance.

The combination of the weak macroeconomic environment and a weaker banking system will result in declining availability of credit, which in turn would result in refinancing difficulties for SMEs. Many Portuguese SMEs are either borrowers in ABS transactions or employ obligors in the pools backing consumer ABS or RMBS.

As a consequence of this scenario, the capabilities of the Portuguese banks to perform as transaction parties, such as servicers, may be affected in the future which in our view increases the operational risk for the transactions.

- INCREASING COLLATERAL RISK AND DECLINING CREDIT QUALITY OF TRANSACTION PARTIES DRIVE STRUCTURED FINANCE RATINGS

Subject to the maximum rating guidelines above, in analyzing each structured finance transaction, Moody's addresses the increasing risk of Portuguese collateral and the increasing risk of disruption in the performance of transaction parties.

1) Increasing Collateral Risk

Although the reported performance of Portuguese collateral has been relatively stable in recent periods especially for RMBS, as a result of the weaknesses described above, Moody's expects deteriorating performance for individual obligors on mortgage, consumer and auto loans, as well as for small and medium-sized enterprises (SMEs).

Other factors are increasing risk for RMBS collateral. Most mortgage loans in the securitized pools are floating-rate loans, which means that obligors are also vulnerable to rising interest rates.

As a result, Moody's has updated its assumptions for Portuguese RMBS. For RMBS pools, Moody's has revised base-case losses on current pool balance in ranges from 2% for the better pools, which are those with good performance, moderate LTVs and high seasoning. Moody's revised the base-case losses to 5,5% for riskier pools. Ranges of credit enhancement under Moodys' RMBS model, MILAN Aaa CE, is from 12% to 30%.

Moody's also has updated its assumptions for Portuguese ABS. For ABS consumer pools, Moody's has updated its default assumptions for the Nova 4 transaction to 9% of the current pool's balance. For all other transactions, key collateral assumptions remained unchanged as Moody's has recently set or reviewed them.

For ABS SME pools, Moody's has recently revised assumptions on SMEs loans in seasoned transactions to align these assumptions with those for transactions rated in 2010 and 2011. In those transactions the SME loan default assumption is consistent with the default rate of an obligor with a B-equivalent rating.

As a result of the increasing risk of Portuguese collateral, most Portuguese structured finance transactions cannot retain or achieve ratings above A2(sf) unless they benefit from (i) external and unconditional guarantees from highly rated counterparties; (ii) are cash-collateralized; or (iii) have both a robust structure and an asset pool that are relatively less sensitive to country risk. Moody's has placed on review the Aaa(sf) rating of an ABS tranche guaranteed by the European Investment Fund (Aaa) because the benefit of the guarantee may be conditional to the performance of transaction parties. One ABS tranche that is cash collateralized by reserve funds with a P-1 rated bank has retained a A1(sf) rating. Two ABS backed by electricity tariff deficit receivables are now A1(sf) but remain on review for possible downgrade, as discussed in more detail below.

Some RMBS and ABS senior tranches may retain A2(sf) ratings if they benefit from high credit enhancement and have low performance disruption risk (see paragraph 2 below). High credit enhancement is 13-25% for RMBS (depending on pool characteristics), 30-35% for consumer ABS and 40-45% for SME ABS.

2) Increasing Risk of Performance Disruption

In line with rating guidance entitled "Global Structured Finance Operational Risk Guidelines: Moody's Approach to Analyzing Performance Disruption Risk", published in March 2011, Moody's has considered the impact of the potential deterioration of credit quality of transaction parties in Portuguese ABS and RMBS as well as operational risk mitigants such as available liquidity.

The key transaction parties affected are servicers. Most Portuguese ABS and RMBS servicers are Portuguese banks, most of which have their ratings currently under review for downgrade. The transactions' calculation agents and cash managers are either Portuguese banks or other European or American banks.

In assessing the impact of the potential deterioration of transaction parties, Moody's addresses the credit quality of the parties together with the amount of liquidity and credit enhancement in the transaction. For transactions that have adequate liquidity and have servicers that are banks that currently have ratings at or above A3, the senior notes can retain A2(sf) ratings, subject to minimum credit enhancement tests described above. Transactions serviced by Portuguese banks that have current debt ratings in the Baa range and benefit from independent cash managers and sufficient liquidity can retain ratings of A3(sf), again subject to credit enhancement tests. All other transactions have had their senior debt ratings downgraded to Baa1(sf) and below because of Moody's conclusion that the risk of performance disruption is not consistent with single-A ratings.

Moody's placed on review the Aaa(sf) rating of class B of Douro SME 1 which the European Investment Fund (EIF) (Aaa) guarantees. The reason for the review is the uncertainty whether or not the cash manager can calculate the shortfall under the guarantee upon a servicer disruption and failure to produce a servicer report.

In addition, Moody's has maintained the ratings of 12 tranches in 7 ABS transactions on review for downgrade pending the implementation of various remedies in relation to commingling, set-off or back-up servicing arrangements.

Should the ABS and RMBS transactions not implement remedies following trigger breaches, Moody's may further downgrade some tranches by one to two notches.

If the ongoing ratings review of most Portuguese banks results in downgrades of more than three notches from the current ratings, then the ratings of Portuguese structured finance transactions may undergo further adjustments.

- MOODY'S DOWNGRADES TO A1(SF) RATINGS OF TWO PORTUGUESE ELECTRICITY TARIFF DEFICIT ABS; RATINGS REMAIN UNDER REVIEW

Moody's has today downgraded to A1(sf) from Aaa(sf) the ratings of the two electricity tariff deficit transactions, EnergyOn No.1 and No2 issued by Tagus - Sociedade de Titularização de Créditos, S.A. and leaves the ratings on review for possible downgrade.

Moody's believes that remote macroeconomic stress scenarios involving sharp spikes in electricity prices or declines in consumption, combined with severe fiscal tightening, increase the risk of politically motivated changes to the terms of the tariff deficit repayment mechanism underlying the transactions. In addition, the rating agency believes that severe financial distress scenarios for EDP Distribuição -- Energia, S.A., a subsidiary of EDP -- Energias de Portugal, S.A. (rated Baa3/P-3), in its capacity as agent of the Portuguese national electricity system for the delivery of payments on the assets securitised, increase the risk of payment disruptions.

During its rating review, Moody's will investigate the mechanisms designed to ensure timely payment on the notes in the event of mismatches between the revenues and the costs of the Portuguese electricity system.

RATING METHODOLOGIES

The determination of the highest achievable ratings and minimum credit enhancement requirements described above complement the applicable principal methodologies for each asset class.

Four major asset-class methodologies apply. The principal methodology used in rating RMBS transactions was Moody's Approach to Rating RMBS in Europe, Middle East, and Africa, published in October 2009. The principal methodology used in rating Consumer ABS transactions was Moody's Approach to Rating Consumer Loan ABS Transactions, published in July 2011. The principal methodology used in rating Auto ABS transactions was Moody's Approach to Rating European Auto ABS, published November 2002. The principal methodology used in rating ABS SME was Moody's Approach to Rating CDOs of SMEs in Europe, published February 2007.

To identify the principal methodology for each of the other asset classes of the affected transactions, please refer to the index of methodologies under the research and ratings tab on Moodys.com.

Moody's rating methodology for the electricity tariff deficit transactions considers the strength of the specific legislation enacted to set forth the regulatory claims and the repayment mechanisms, the creditworthiness and strategic role of the distribution grid operator, EDP Distribuição --

Energia, S.A., and the creditworthiness of key counterparties. For further information on the rating approach, please see the new issue reports publicly available for the EnergyOn No.1 and No. 2 Securitisation Notes.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with amendment resulting from that disclosure.

Information sources used to prepare the 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.

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.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

The lead analyst and rating office for each of the transactions affected are generally different from the contact and office listed at the end of this press release. For each transaction, the lead analyst name is available on the issuer page, and the rating office is available on the ratings tab of the issuer on www.moodys.com.

Moody's adopts all necessary measures so that the information it uses in assigning a 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.

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 on our website www.moodys.com for further information.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's 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 our website www.moodys.com for further information.

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.

Madrid
Maria Turbica Manrique
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Barbara Rismondo
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Portuguese ABS and RMBS structured finance transactions
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