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Rating Action:

Moody's downgrades UK NC RMBS notes issued by Eurosail 2006-4NP PLC and Eurosail-UK 2007-2NP PLC

01 Oct 2010

Approximately GBP 525 million of rated debt securities affected

London, 01 October 2010 -- Issuer: Eurosail 2006-4NP PLC

....GBP171.3M A2c Notes, Confirmed at Aaa (sf); previously on Sep 17, 2008 Aaa (sf) Placed Under Review for Possible Downgrade

....EUR98.5M A3a Notes, Downgraded to Aa2 (sf); previously on Sep 17, 2008 Aaa (sf) Placed Under Review for Possible Downgrade

....GBP150M A3c Notes, Downgraded to Aa2 (sf); previously on Sep 17, 2008 Aaa (sf) Placed Under Review for Possible Downgrade

....EUR34M M1a Notes, Downgraded to Aa3 (sf); previously on Sep 17, 2008 Aa1 (sf) Placed Under Review for Possible Downgrade

....GBP12M M1c Notes, Downgraded to Aa3 (sf); previously on Sep 17, 2008 Aa1 (sf) Placed Under Review for Possible Downgrade

Issuer: Eurosail-UK 2007-2NP PLC

....EUR127.5M A2a Notes, Downgraded to Aa1 (sf); previously on Sep 17, 2008 Aaa (sf) Placed Under Review for Possible Downgrade

....GBP48M A2c Notes, Downgraded to Aa1 (sf); previously on Sep 17, 2008 Aaa (sf) Placed Under Review for Possible Downgrade

....EUR139.5M A3a Notes, Downgraded to Aa2 (sf); previously on Sep 17, 2008 Aaa (sf) Placed Under Review for Possible Downgrade

....GBP75M A3c Notes, Downgraded to Aa2 (sf); previously on Sep 17, 2008 Aaa (sf) Placed Under Review for Possible Downgrade

RATINGS RATIONALE

All the affected tranches listed above had been placed on review for possible downgrade on 17th September 2008 because of their exposure to Lehman Brothers Holding Inc ("LBHI"). Today's rating actions conclude the review and take into account the exposure to Capstone Mortgage Services Ltd ("Capstone") formerly owned by LBHI performing servicing and cash management functions in both transactions, as well as worse than expected collateral performance which resulted in increased loss expectations for the two mortgage portfolios.

The ratings of the notes takes into account the credit quality of the underlying mortgage loan pool, from which Moody's determined the MILAN Aaa Credit Enhancement (MILAN Aaa CE) and the portfolio expected loss, as well as the transaction structure as assessed in Moody's cash flow analysis. The loss expectation and the MILAN Aaa CE are the two key parameters used by Moody's to calibrate its loss distribution curve, which is one of the core inputs in the cash-flow model it uses to rate RMBS transactions.

Portfolios Expected Loss: Moody's has reassessed its lifetime loss expectation for Eurosail 2006-4 and Eurosail 2007-2 taking into account the collateral performance to date. Both transactions have been performing worse than Moody's initial assumptions. Cumulative losses amount to 2.2% and 2.4% of the original portfolio balance in Eurosail 2006-4 and Eurosail 2007- 2 respectively. The primary source of assumption uncertainty is the current macroeconomic environment, with elevated unemployment, weak house prices and an anticipated tightening of fiscal policy. Moody's maintains a negative sector outlook for UK NC RMBS. Considering the current amount of realised losses, and completing a roll-rate and severity analysis for the non-defaulted portion of the portfolio, Moody's has increased its total loss expectations to 5% of the original portfolio balance for Eurosail 2006-4 and to 6% of the original portfolio balance for Eurosail 2007-2 (vs. 1.8% and 1.9% assumed at closing).

MILAN Aaa CE: Moody's has assessed the loan-by-loan information for the portfolios and concluded to increase its MILAN Aaa CE assumptions to 20% for Eurosail 06-4 and 22% for Eurosail 07-2, up from 15.3% and 17.2% respectively at closing. This increase mainly reflects the relatively high arrears levels in the portfolios; currently delinquencies 90 days plus constitute 13% of the outstanding portfolio balance in Eurosail 2006-4 and 15.2% in Eurosail 2007-2.

Operational Risk Analysis: Moody's has analysed the potential operational risks associated with Capstone performing the servicing and cash management functions in both transactions. Following a review of Capstone servicing operations, Moody's is satisfied of the ability of the servicer to perform its duties considering current resources, systems and procedures. Capstone recently completed a restructuring which included senior management taking a minority stake in the business and announcing the intention to grow its business. However, uncertainties remain as to the success of the business model and the timeline of the evolution of its ownership. Moody's considers the back-up cash management arrangements in place with Homeloan Management Limited ("HML") to be not sufficiently hot to ensure a timely payment of principal and interest on the notes and payments to the cross-currency swap provider within the grace period in all scenarios. This consideration has affected the ratings of the senior notes in the reviewed transactions by approximately 1 to 2 notches, depending on the remaining life of the note and the available credit enhancement. Class A2 in Eurosail 2006-4 is likely to be fully repaid at the next interest payment date and its rating has been confirmed at Aaa (sf).

Legal Risk Related to Limited Recourse in Structures Relying on Post Enforcement Call Options ("PECO"): Following the judgment of the UK High Court in BNP Corporate Trustee Services Ltd v Eurosail UK 2007-3BL PLC, Moody's assumes that in absence of traditional limited recourse language, an issuer will become balance sheet insolvent if the value of its assets fall below the amount of its liabilities, regardless of whether a PECO forms part of the transaction (see Moody's announcement "UK High Court judgment may have rating implications for certain UK-based structured finance transactions", published 19 August 2010). Moody's has assessed the potential consequences of an occurrence of a balance sheet insolvency of the issuer in Eurosail 2006-4 and Eurosail 2007-2 and concluded that this event would have no rating impact on these two transactions. An enforcement notice, which could be served by the trustee if directed by at least 25% most senior noteholders, would trigger a switch to a post-enforcement payment waterfall, whereby the subclasses of the A class would rank pro rata pari passu. Moody's has tested the cash flow allocation under the post-enforcement waterfall and concluded that it would have no rating impact on the notes in consideration to the relatively high credit enhancement available to senior notes in these two transactions. In addition, neither an event of default under the notes nor the service of an enforcement notice would constitute a termination event under the documentation of the cross currency swap agreements.

Eurosail 2006-4 closed in November 2006 and the current pool factor is approximately 46%. The assets supporting the notes are non-conforming first-ranking mortgage loans secured by residential properties located in the UK. The original weighted average LTV at closing was approximately equal to 75.7% while the current weighted average LTV has decreased to approximately 73.5%. The cumulative losses realised since closing amount to 2.2% of the original portfolio balance, with an average loss severity since inception of 29.3%. Previously there had been drawings on the reserve fund, however, currently the reserve fund is fully funded at 0.5% of the original portfolio balance which corresponds to 1.1% of the outstanding portfolio balance.

Eurosail 2007-2 closed in March 2007 and the current pool factor is approximately 63%. The assets supporting the notes are non-conforming first-ranking mortgage loans secured by residential properties located in the UK. The original weighted average LTV at closing was approximately equal to 77.3% while the current weighted average LTV has decreased to approximately 74.9%. The cumulative losses realised since closing amount to 2.4% of the original portfolio balance, with an average loss severity since inception of 32.8%. Previously there had been drawings on the reserve fund, however, currently the reserve fund is fully funded at 0.4% of the original portfolio balance which corresponds to 0.7% of the outstanding portfolio balance.

Moody's notes that following the bankruptcy filing of LBHI, an event of default has occurred in the interest rate and basis swap agreements in place for both transactions. As of today the fixed-floating and BBR swaps for Eurosail 2006-4 have been terminated, but no replacement swaps have been entered into by the issuer. In our current rating review, Moody's has assumed that the issuer will not enter into replacement swaps and will be exposed to interest rate and basis risk until transaction maturity. The fixed-floating and BBR swaps for Eurosail 2007-2 have not been terminated.

The residual interest rate risk exposure is very limited in both transactions as the few remaining fixed rate loans are reverting to floating rate within January 2011 and April 2011 for Eurosail 2006-4 and Eurosail 2007-2 respectively.

There are two sources of basis risk in the transactions. First, for the BBR portion of the mortgage portfolios there is a risk of mismatch between the BBR on the mortgage loans and the Note Libor. Also, both transactions are exposed to some basis risk due to the reset date mismatch between the Note Libor and the Libor on the mortgage loans which is approximately a 3-5 day period. The basis risk has been sized by Moody's, however, it is limited and is not the driver of today's rating actions.

Some of the notes in the two transactions are denominated in EUR as detailed in the list above. The issuers have entered into currency swap agreements with Barclays Bank PLC in the case of Eurosail 2006-4 and with Swiss Re Financial Products Corporation in the case of Eurosail 2007-2 to hedge the foreign exchange risk.

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 in monitoring these transactions are Moody's Approach to Rating UK RMBS published in April 2005, Moody's Updated Methodology for Rating UK RMBS published in November 2007 and Revising Default/Loss Assumptions Over the Life of an ABS/RMBS Transaction published in December 2008. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

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 6 months.

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, confidential and proprietary Moody's Investors Service's 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.

Additional research, including the pre-sale report for this transaction and reports for prior transactions, are available at 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

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.

London
Maria Divid
Associate Analyst
Structured Finance Group
Moody's Investors Service Ltd.
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 Ltd.
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Moody's downgrades UK NC RMBS notes issued by Eurosail 2006-4NP PLC and Eurosail-UK 2007-2NP PLC
No Related Data.
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