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Rating Action:

Moody's downgrades Portuguese ABS and RMBS structured finance transactions

Global Credit Research - 12 Apr 2011

Paris, April 12, 2011 -- Moody's Investors Service today downgraded the ratings of 5 tranches of Portuguese asset-backed securities (ABS) and 18 tranches of residential mortgage-backed securities (RMBS) transactions to Aa2(sf) and 4 tranches of ABS and 20 tranches of RMBS transactions to A1(sf). In addition, the rating agency has placed on review for possible downgrade the ratings of the mezzanine and junior tranches on two ABS transactions and the Aaa ratings of two Portuguese electricity tariff deficit transactions. The affected ratings remain on review for further possible downgrade pending: (i) the conclusion of the rating review of Portuguese government and bank ratings; and (ii) Moody's detailed review of the collateral and structural features of each transactions. Today's action does not affect Portuguese ABS tranches guaranteed by the European Investment Fund (EIF, rated Aaa).

Most Portuguese structured finance transactions cannot retain or achieve ratings above Aa2(sf) unless they benefit from external guarantees from highly rated counterparties or have both a robust structure and assets that are relatively less sensitive to country risk.

All affected ratings appear at the end of the press release and in separate data supplement available for download under the following links:

- ABS: http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF242909

- RMBS: http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF242391

RATINGS RATIONALE

- Increased Political, Budgetary and Economic Uncertainty and Weaker Banking System Weaken Structured Finance Transactions

Today's rating actions follow Moody's successive downgrades of Portugal's government rating from A1 to A3 on 15 March 2011 and from A3 to Baa1 on 5 April 2011 ("Moody's downgrades Portugal's bond ratings to Baa1 from A3, still under review down"). Also, Moody's downgraded Portuguese banks on 6 April 2011 ("Moody's takes rating actions on Portuguese banks").

The fragility of Portugal's financial position and that of its banking system weaken the performance of structured finance transactions in different ways. The deteriorating economic environment and possibly the government's ambitious deficit reduction targets will hurt obligor performance. A weak macroeconomic environment, combined with a weaker banking system, sets the stage for a credit crunch, which in turn would result in refinancing difficulties for SMEs. Many Portuguese SMEs either are borrowers in ABS transactions or employ obligors in the pools backing consumer ABS or RMBS. Last, the weakening of banks increases operational risk from the potential disruption of their performance as transaction parties, such as servicers.

The downgrade of Portugal reflects a combination of factors including: (i) the uncertain political outlook, following the resignation of the government after the rejection of the revised budget measures announced on 11 March 2011 and the resulting reduction in the speed and decisiveness of policy making; (ii) the short- and medium-term funding challenges for the government; and (iii) the medium-term implications of revisions to the estimates for the budget deficit and outstanding government debt for fiscal consolidation. Portugal's Baa1 rating remains on review for possible downgrade given the uncertainties surrounding the political outlook and potential measures to be taken after the June 2011 elections.

- Highest Achievable Rating for Most Portuguese Structured Finance Ratings is Aa2(sf)

Moody's no longer expects most Portuguese structured finance transactions to retain or achieve a rating of Aa2(sf) or above, aside from a few exceptions discussed below. The primary reason for this conclusion is the increased likelihood of high severity events. Our recent multi-notch downgrades of the Portuguese government's rating reflect this increased likelihood.

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 high severity events and the level of uncertainty around them. Regardless of the structural features or the amount of credit enhancement, structured finance transactions are not immune to the risk of certain high severity events. These events include a severe macroeconomic decline, deterioration in a sovereign or local banks' creditworthiness and political uncertainties. In addition, while Moody's central scenario does not include a sovereign default or distressed exchange, the consequences of either event, including possible changes in the terms or enforcement of certain debt contracts, could overwhelm the benefits of credit enhancement and structural mitigants.

Nonetheless, in analysing each structured finance transaction, Moody's will continue to recognise that transactions with high credit enhancement can sustain significant asset performance deterioration and that operational risk mitigants can reduce the linkage between the structured finance ratings and the credit quality of key transaction parties.

- Moody's Downgrades Senior Standard Portuguese ABS/RMBS to Aa2(sf) or to A1(sf) and Leaves Ratings on Review for Downgrade

Moody's expects greater rating downgrades for tranches that have lower credit enhancement in their respective asset class. Therefore, as a first step, Moody's downgraded senior tranches to the highest achievable rating of Aa2(sf) or, for the senior tranches that have relatively low credit enhancement, to A1(sf). Moody's placed on review for possible downgrade mezzanine and junior tranches that have low credit enhancement levels compared with their current rating levels.

All ratings remain on review for possible further downgrades pending: (i) analysis of the deal-specific performance, the remaining life of tranches and the structural features, such as credit enhancement and operational risks mitigants; and (ii) the conclusion of the current review for possible downgrade on Portuguese sovereign and bank ratings.

- Moody's Places on Review for Possible Downgrade Aaa(sf) Ratings of Portuguese Electricity Tariff Deficit ABS

For the Aaa(sf) ratings placed on review for possible downgrade for two electricity tariff deficit transactions (EnergyOn No.1 and No2 issued by Tagus - Sociedade de Titularização de Créditos, S.A), Moody's considers that remote macroeconomic stress scenarios involving sharp spikes in electricity prices or declines in consumption, combined with severe fiscal tightening, could result in political pressure for 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 Baa1/P-2, on review for possible downgrade), in its capacity as agent of the Portuguese national electricity system for the delivery of payments on the assets securitised, increase the risk of temporary payment disruptions despite strong mitigation mechanisms.

However Moody's views those electricity tariff deficit transactions as more resilient to sovereign or corporate distress scenarios than other Portuguese structured finance transactions and thus as likely to retain higher ratings. These electricity tariff deficit transactions have both a robust structure and assets that are relatively insensitive to country risk. As a result, Moody's expects to continue to rate them above the highest achievable ratings for most Portuguese securitisations.

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. To identify the primary methodology for each of the 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 report publicly available for the EnergyOn No.1 and the ErgerguOn No2 Securitisation Notes.

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 these transactions in the past six months.

LIST OF AFFECTED SECURITIES

ABS transactions

Issuer: AR FINANCE 1 plc

A Bond, Downgraded to Aa2 (sf) and Remains On Review for Possible Downgrade; previously on Mar 2, 2011 Aaa (sf) Placed Under Review for Possible Downgrade

Issuer: Atlantes Finance No. 3

A Certificate, Downgraded to Aa2 (sf) and Placed Under Review for Possible Downgrade; previously on Jul 29, 2010 Assigned Aaa (sf)

Issuer: BST SME NO.1

A Certificate, Downgraded to Aa2 (sf); previously on Mar 14, 2011 Assigned Aaa (sf) and Placed Under Review for Possible Downgrade

Issuer: Caravela SME No.1 Limited

A Notes, Downgraded to A1 (sf); previously on Jun 22, 2010 Aaa (sf) Placed Under Review for Possible Downgrade

B Notes, Downgraded to A1 (sf); previously on Jun 22, 2010 Aa2 (sf) Placed Under Review for Possible Downgrade

C Notes, A2 (sf) Placed Under Review for Possible Downgrade; previously on Nov 28, 2008 Assigned A2 (sf)

D Notes, Baa2 (sf) Placed Under Review for Possible Downgrade; previously on Nov 28, 2008 Assigned Baa2 (sf)

E Notes, Ba2 (sf) Placed Under Review for Possible Downgrade; previously on Nov 28, 2008 Assigned Ba2 (sf)

Issuer: SAGRES Sociedade de Titularização de Créditos, S.A. (Douro SME Series 1)

A Notes, Downgraded to Aa2 (sf); previously on Jun 22, 2010 Aaa (sf) Placed Under Review for Possible Downgrade

Issuer: (EnergyOn No. 2) Tagus - Sociedade de Titularização de Créditos, S.A.

A Certificate, Aaa (sf) Placed Under Review for Possible Downgrade; previously on Dec 3, 2009 Assigned Aaa (sf)

Issuer: (EnergyOn No. 1) Tagus - Sociedade de Titularizacao de Creditos, S.A.

A1 Certificate, Aaa (sf) Placed Under Review for Possible Downgrade; previously on Mar 6, 2009 Assigned Aaa (sf)

Issuer: Lusitano SME No. 2

A Certificate, Downgraded to Aa2 (sf) and Remains On Review for Possible Downgrade; previously on Jan 14, 2011 Assigned Aaa (sf) and Placed Under Review for Possible Downgrade

B Certificate, A2 (sf) Placed Under Review for Possible Downgrade; previously on Jan 14, 2011 Assigned A2 (sf)

Issuer: NOVA Finance No. 4 Limited

A Certificate, Downgraded to A1 (sf); previously on Jun 22, 2010 Aaa (sf) Placed Under Review for Possible Downgrade

B Certificate, Downgraded to A1 (sf); previously on Jun 22, 2010 Aa2 (sf) Placed Under Review for Possible Downgrade

RMBS transactions

Issuer: Atlantes Mortgage No. 1 PLC

A Note, Downgraded to Aa2 (sf) and Remains On Review for Possible Downgrade; previously on Jun 22, 2010 Aaa (sf) Placed Under Review for Possible Downgrade

Issuer: Azor Mortgages Public Limited Company

A Bond, Downgraded to Aa2 (sf) and Remains On Review for Possible Downgrade; previously on Dec 23, 2010 Aaa (sf) Placed Under Review for Possible Downgrade

Issuer: Bocage Mortgages No. 1 Limited

A Notes, Downgraded to Aa2 (sf) and Remains On Review for Possible Downgrade; previously on Jun 22, 2010 Aaa (sf) Placed Under Review for Possible Downgrade

Issuer: Bocage Mortgages No. 2 Limited

A Notes, Downgraded to Aa2 (sf) and Remains On Review for Possible Downgrade; previously on Jun 22, 2010 Aaa (sf) Placed Under Review for Possible Downgrade

Issuer: Douro Mortgages No. 1 Notes

A Note, Downgraded to A1 (sf) and Remains On Review for Possible Downgrade; previously on Jun 22, 2010 Aaa (sf) Placed Under Review for Possible Downgrade

B Note, Downgraded to A1 (sf) and Remains On Review for Possible Downgrade; previously on Jun 22, 2010 Aa2 (sf) Placed Under Review for Possible Downgrade

Issuer: DOURO MORTGAGES No. 2

A1 Note, Downgraded to A1 (sf) and Remains On Review for Possible Downgrade; previously on Jun 22, 2010 Aaa (sf) Placed Under Review for Possible Downgrade

B Note, Downgraded to A1 (sf) and Remains On Review for Possible Downgrade; previously on Jun 22, 2010 Aa3 (sf) Placed Under Review for Possible Downgrade

....EUR1125M A2 Note, Downgraded to A1 (sf) and Remains On Review for Possible Downgrade; previously on Jun 22, 2010 Aaa (sf) Placed Under Review for Possible Downgrade

Issuer: DOURO MORTGAGES No. 3

A Note, Downgraded to A1 (sf) and Remains On Review for Possible Downgrade; previously on Jun 22, 2010 Aaa (sf) Placed Under Review for Possible Downgrade

Issuer: HIPOTOTTA No1. PLC

A Bond, Downgraded to Aa2 (sf) and Remains On Review for Possible Downgrade; previously on Jun 22, 2010 Aaa (sf) Placed Under Review for Possible Downgrade

Issuer: HIPOTOTTA NO. 4 PLC

A Notes, Downgraded to Aa2 (sf) and Remains On Review for Possible Downgrade; previously on Jun 22, 2010 Aaa (sf) Placed Under Review for Possible Downgrade

Issuer: HIPOTOTTA No 5 plc

A2 Notes, Downgraded to A1 (sf) and Remains On Review for Possible Downgrade; previously on Jun 22, 2010 Aaa (sf) Placed Under Review for Possible Downgrade

B Notes, Downgraded to A1 (sf) and Remains On Review for Possible Downgrade; previously on Jun 22, 2010 Aa2 (sf) Placed Under Review for Possible Downgrade

Issuer: Hipototta No.7 Limited

A2 Notes, Downgraded to Aa2 (sf) and Remains On Review for Possible Downgrade; previously on Jun 22, 2010 Aaa (sf) Placed Under Review for Possible Downgrade

Issuer: Hipototta No. 8 Limited

A2 Notes, Downgraded to Aa2 (sf) and Remains On Review for Possible Downgrade; previously on Jun 22, 2010 Aaa (sf) Placed Under Review for Possible Downgrade

....EUR40.6M B Notes, Downgraded to A1 (sf) and Remains On Review for Possible Downgrade; previously on Jun 22, 2010 Aa3 (sf) Placed Under Review for Possible Downgrade

Issuer: HIPOTOTTA 12

A Notes, Downgraded to Aa2 (sf) and Placed Under Review for Possible Downgrade; previously on Feb 25, 2011 Assigned Aaa (sf)

Issuer: Lusitano Mortgages No. 1 PLC

A Bond, Downgraded to Aa2 (sf) and Remains On Review for Possible Downgrade; previously on Jun 22, 2010 Aaa (sf) Placed Under Review for Possible Downgrade

Issuer: Lusitano Mortgages No. 2 PLC

A Bond, Downgraded to Aa2 (sf) and Remains On Review for Possible Downgrade; previously on Jun 22, 2010 Aaa (sf) Placed Under Review for Possible Downgrade

Issuer: LUSITANO MORTGAGES No. 3 PLC

A Bond, Downgraded to A1 (sf) and Remains On Review for Possible Downgrade; previously on Jun 22, 2010 Aaa (sf) Placed Under Review for Possible Downgrade

B Bond, Downgraded to A1 (sf) and Remains On Review for Possible Downgrade; previously on Jun 22, 2010 Aa2 (sf) Placed Under Review for Possible Downgrade

Issuer: Lusitano Mortgages No. 4 PLC

A Note, Downgraded to A1 (sf) and Remains On Review for Possible Downgrade; previously on May 7, 2010 Aaa (sf) Placed Under Review for Possible Downgrade

B Note, Downgraded to A1 (sf) and Remains On Review for Possible Downgrade; previously on May 7, 2010 Aa2 (sf) Placed Under Review for Possible Downgrade

Issuer: Lusitano Mortgages nº 5

A Note, Downgraded to A1 (sf) and Remains On Review for Possible Downgrade; previously on May 7, 2010 Aaa (sf) Placed Under Review for Possible Downgrade

Issuer: Lusitano Mortgages No.6 Limited

A Note, Downgraded to Aa2 (sf) and Remains On Review for Possible Downgrade; previously on Jun 22, 2010 Aaa (sf) Placed Under Review for Possible Downgrade

Issuer: Magellan Mortgages No. 1 Public Limited Company

A Bond, Downgraded to Aa2 (sf) and Remains On Review for Possible Downgrade; previously on Jun 22, 2010 Aaa (sf) Placed Under Review for Possible Downgrade

Issuer: Magellan Mortgages No. 2 plc

A Notes, Downgraded to Aa2 (sf) and Remains On Review for Possible Downgrade; previously on Jun 22, 2010 Aaa (sf) Placed Under Review for Possible Downgrade

Issuer: Magellan Mortgages No. 3 plc

A Notes, Downgraded to A1 (sf) and Remains On Review for Possible Downgrade; previously on Jun 22, 2010 Aaa (sf) Placed Under Review for Possible Downgrade

Issuer: Magellan Mortgages No. 4 plc

A Note, Downgraded to A1 (sf) and Remains On Review for Possible Downgrade; previously on Jun 22, 2010 Aaa (sf) Placed Under Review for Possible Downgrade

B Note, Downgraded to A1 (sf) and Remains On Review for Possible Downgrade; previously on Jun 22, 2010 Aa3 (sf) Placed Under Review for Possible Downgrade

Issuer: Navigator Mortgage Finance No. 1 plc

A Bond, Downgraded to Aa2 (sf) and Remains On Review for Possible Downgrade; previously on Mar 2, 2011 Aaa (sf) Placed Under Review for Possible Downgrade

Issuer: Nostrum Mortgages 2003-1 PLC

A Bond, Downgraded to A1 (sf) and Remains On Review for Possible Downgrade; previously on Jun 22, 2010 Aaa (sf) Placed Under Review for Possible Downgrade

Issuer: Nostrum Mortgages No.2

A Notes, Downgraded to Aa2 (sf) and Placed Under Review for Possible Downgrade; previously on Nov 5, 2010 Assigned Aaa (sf)

Issuer: Pelican Mortgages No. 1 Plc

A Bond, Downgraded to Aa2 (sf) and Remains On Review for Possible Downgrade; previously on Dec 23, 2010 Aaa (sf) Placed Under Review for Possible Downgrade

Issuer: Pelican Mortgages No. 2 Plc

A Bond, Downgraded to Aa2 (sf) and Remains On Review for Possible Downgrade; previously on Jun 22, 2010 Aaa (sf) Placed Under Review for Possible Downgrade

Issuer: Pelican Mortgages No.3 plc

A Notes, Downgraded to A1 (sf) and Remains On Review for Possible Downgrade; previously on Jun 22, 2010 Aaa (sf) Placed Under Review for Possible Downgrade

B Notes, Downgraded to A1 (sf) and Remains On Review for Possible Downgrade; previously on Jun 22, 2010 Aa2 (sf) Placed Under Review for Possible Downgrade

REGULATORY DISCLOSURES

Ratings have been disclosed to the rated entities or their designated agents and issued with no amendment resulting from that disclosure.

Information sources used to prepare the credit ratings 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 Investors Service considers the quality of information available on the issuers or obligations satisfactory for the purpose of maintaining credit ratings.

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 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.

Paris
Ariel Weil
Vice President - Senior Analyst
Structured Finance Group
Moody's France SAS
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Paris
Annick Poulain
MD - Structured Finance
Structured Finance Group
Moody's France SAS
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Portuguese ABS and RMBS structured finance transactions
No Related Data.
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MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it fees ranging from JPY200,000 to approximately JPY350,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.