EUR 14.8m of notes affected
Frankfurt am Main, January 28, 2011 -- Moody's Investors Service announced today the following rating action
on notes issued by Eirles Two Limited Series 298.
Issuer: Eirles Two Limited Series 298 (Repack Force Equity)
....EUR14.8M A Notes, Downgraded
to Caa3 (sf); previously on Oct 12, 2009 Downgraded to B1 (sf)
and Remained On Review for Possible Downgrade
RATINGS RATIONALE
The rating action follows the increase of the loss expectations to the
underlying Class E1 of the transaction Force 2005-1. Series
298 has experienced an interest shortfall of approximately EUR 1.4m
to date.
Eirles Two is a repackaging of 31.1m of the Class EUR 46.7m
Class E1 notes of Force 2005-1. The Series 298 is the senior
class of Eirles Two and makes up EUR 14.8 million. The payments
to Force 2005-1 Class E1 are passed through to Eirles Two and paid
according to the its priority of payments. The performance of Classes
of Eirles Two are therefore linked to the performance of Force 2005-1.
Force 2005-1 is a German SME CLO referencing a static portfolio
of German profit participation agreements ("Genussrechte") with a scheduled
maturity of January 2013. Some of the "Genussrechte"
in the portfolio have certain features of equity including subordination
and linkage of payments to financial performance of the obligor such as
interest deferral features and contingent coupon components. Such
obligations can be written down depending on financial performance of
the obligor and may extend redemption beyond the legal final maturity
of the transaction which is 4 years after its scheduled maturity date.
These obligations make up nearly 90% of the outstanding pool.
Obligations which have not redeemed at par plus accrued interest by the
scheduled maturity of the transaction will be extended up to the earlier
of 22 years and the date on which all payments due under the profit participation
agreement have been made. If such payments have not been made before
the legal maturity of the transaction in January 2017, this is likely
to lead to a loss for Force 2005-1.
According to Moody's the rating action is driven by 1) the revision of
IKB's internal rating scale and process used to assess the creditworthiness
of SME borrowers, 2) the application of maturity extension and coupon
reduction to stress for the deferral and extension features of a majority
of the obligations in the pool, and 3) the deterioration in the
credit quality of the pool.
Force 2005-1 has experienced EUR 13 million of further insolvencies
since the last rating action. Class A has redeemed approximately
EUR 22.2m since last rating action by paydowns of the PDL.
The PDL balance has decreased to EUR 4.7m from EUR 7.4m
at the time of the last rating action. Cumulative Principal Deficiency
Events relative to the original portfolio amount have increased to 13.5%
from 10.3% at the time of the last rating action,
by the investor reports dated through 17 November 2010. This excludes
early terminations at full repayment and includes an increase of cumulative
insolvencies relative to the original portfolio to 11.1%
from 7.6% at the time of the last rating action, by
the investor reports dated through 17 November 2010. Class E1 and
E2 have experienced interest deferrals of EUR 10.8m to date.
In its base case, Moody's analyzed the underlying collateral pool
of Force 2005-1 with a stressed weighted average default probability
to scheduled maturity (January 2013) of 19%. This is consistent
with the default probability level of a B3 rating. Moody's notes
that the transaction benefits from a material level of excess spread that
has allowed it to substantially cure the PDL and will continue to partially
mitigate the impact of potential new defaults.
In order to assess the default probabilities of each of the borrowers
in the pool, Moody's relies on the internal credit scores assigned
to each borrower by Equinotes Management GmbH, as Advisor to the
transaction, following the IKB rating process and methodology for
SME obligors. Following the recent revision by IKB of its internal
credit score scale, which provides a more detailed assessment of
credit risk levels, Moody's revisited its mapping to IKB credit
scores i.e. the way the bank's internal credit scores are
translated into Moody's idealized default probabilities. The greater
conservativeness embedded in IKB's revised credit scores drives IKB internal
ratings to map to higher Moody's default probabilities and therefore has
a negative impact on the ratings of the notes.
Moody's has changed its approach to stressing "Genussrechte"
with deferral and extension features. At closing Moody's modelled
the risk of such assets using a rating migration approach that assessed
the likelihood that debtors would default on or defer fixed remunerations
and/or principal payments. Instead, Moody's now applies a
haircut to the coupons and extends the expected lives of such assets,
with a severity reflecting the current rating of each obligor.
Moody's also incorporated information provided by the manager in the latest
investor reports to account for more recent information on the performance
of the underlying obligors. Various additional scenarios have been
considered for the analysis and include the application of stresses applicable
to concentrated pools with non publicly rated issuers, as outlined
in Moody's Methodology, "Updated approach to the usage of credit
estimates in rated transactions" (October 2009).
The key assumptions Moody's used were the following:
1. Default rates for these pools will likely remain at elevated
levels, despite improvements in the German economy.
2. Recoveries on the subordinated loans may be close to zero in
the majority of cases, particularly when the issuer files for insolvency.
Moody's notes that this transaction is subject to a high level of macroeconomic
uncertainty, as evidenced by 1) uncertainties of credit conditions
in the general economy and 2) the ability of the underlying obligors to
refinance the subordinated bullet loans that make up the securitised pools.
Sources of additional performance uncertainties 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. Due to the pool's lack of granularity, Moody's
supplement its base case scenario with individual scenario analysis.
2. The additional risk presented by the interest deferral and principal
write-down features for some of the assets in the pool.
3. There is the potential for elevated refinancing difficulty regarding
the subordinated debt instruments in this portfolio, particularly
among obligors with weaker credit quality.
The principal methodologies used in this rating were "Moody's Approach
to Rating Collateralized Loan Obligations" published in August 2009,
"Moody's Approach to Rating Corporate Collateralized Synthetic Obligations"
published in September 2009, and "Moody's Approach to Rating CDOs
of SMEs in Europe" published in February 2007.
Under this methodology, Moody's relies on a simulation based framework.
Moody's therefore used CDOROMTM, to generate default and recovery
scenarios for each asset in the portfolio, and then Moody's EMEA
Cash-Flow model in order to compute the associated loss to each
tranche in the structure.
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 this transaction in the past six months.
In addition to its base case for the Force 2005-1 portfolio,
Moody's has considered the impact of stress scenarios on the portfolio.
In one scenario the ratings of 30% of the portfolio are lowered
by 2 notches and in another scenario the ratings of the largest two exposures
are set to Caa2. As the base case scenario already includes the
expectation of further credit stresss to the obligors Moody's considers
the impact of these scenarios to be in line with the new rating level.
Moody's has analyzed the cash flows to the classes of Force 2005-1
and recognizes that the portfolio is generating substantial excess spread
at present. This excess spread will diminish significantly if further
defaults materialize. In such a scenario complete PDL paydowns
may not be possible until the maturity of the transaction. This
will in turn affect payments made to Eirles Two Series 298.
For more information on the Force 2005-1 transaction please see
www.moodys.com
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.
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, public information and confidential
and proprietary Moody's Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
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.
Frankfurt am Main
Matthias Wahl
Associate Analyst
Structured Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
London
Neelam S. Desai
Senior Vice President
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades SME CDO Repack Notes of Eirles Two Series 298
