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Rating Action:

Moody's downgrades certain ratings of CEDO PLC

20 May 2009

Approximately USD 485 Million of debt securities and liquidity facilities affected

London, 20 May 2009 -- Moody's Investors Service announced today it has downgraded 23 ratings on 20 series of notes issued by CEDO PLC and three related loans.

This synthetic CDO refers to a portfolio of Equity Default Swaps (EDS). The portfolio comprises between 55 and 60 EDS in the so-called "Risk Portfolio", on which the SPV is protection seller, and the same number of EDS in the so-called "Insurance Portfolio", on which the SPV is protection buyer. At maturity of the transaction, the number of Net Equity Events (i.e. the difference in number of Equity Events in the Risk Portfolio and in the Insurance Portfolio) defines the amount of loss to be paid by the SPV to the protection buyer.

The number of Net Equity Events is the total number of Hits experienced in the Risk Portfolio less the total number of Hits experienced in the Insurance Portfolio. The primary performance indicator of an EDS is the Barrier, which is the Initial Barrier multiplied by the ratio of the EDS Price at closing and its Current Price. Note that stock prices are adjusted when corporate actions affect a reference entity according to the ISDA Equity Derivatives Definitions. Barriers are computed using the 50-day moving average stock price.

The downgrades are a result of either the buy-back of the notes which resulted in the termination of notes or a result of a restructuring of the notes. Moody's views these events as distressed exchanges which had the effect of allowing the SPV to avoid a payment default at maturity.

Moody's main rating methodology is summarized below. Other methodologies and factors that may have been considered in the process of rating this issue can also be found at <A href="http://www.moodys.com">www.moodys.com</A> in the Ratings Methodologies subdirectory of the Credit Policy & Methodologies directory.

Today's rating actions are as follows:

(1) Series 1 Tranche G EUR 15,000,000 Asset-Backed Deferrable Floating Rate Notes due 2011

Current Rating: Ca

Prior Rating: Caa1

Prior Rating Action Date: 21 January 2009, downgraded from Baa2 to Caa1

(2) Series 2 Tranche A Asset-Backed Deferrable Floating Rates Notes due 2011

Current Rating: Ca

Prior Rating: Caa1

Prior Rating Action Date: 21 January 2009, downgraded from Baa3 to Caa1

(3) Series 2 Tranche B Asset-Backed Deferrable Floating Rate Notes Due 2011

Current Rating: Ca

Prior Rating: Caa2

Prior Rating Action Date: 21 January 2009, downgraded from B1 to Caa2

(4) Series 2 Tranche C Asset-Backed Deferrable Floating Rate Notes due 2011

Current Rating: Ca

Prior Rating: Caa3

Prior Rating Action Date: 21 January 2009, downgraded from B3 to Caa3

(5) Series 2 Tranche J Asset-Backed Fixed Rate Notes due 2011

Current Rating: Ca

Prior Rating: Caa2

Prior Rating Action Date: 21 January 2009, downgraded from B3 to Caa2

(6) Series 2 Tranche G Asset-Backed Deferrable Floating Rate Notes due 2011

Current Rating: Ca

Prior Rating: Caa3

Prior Rating Action Date: 21 January 2009, downgraded from B3 to Caa3

(7) Series 2 Tranche I Asset-Backed Fixed Rate Notes due 2011

Current Rating: Ca

Prior Rating: Caa1

Prior Rating Action Date: 21 January 2009, downgraded from B3 to Caa1

(8) Series 2 Tranche H Asset-Backed Floating Rate Notes due 2011

Current Rating: Ca

Prior Rating: Caa3

Prior Rating Action Date: 21 January 2009, downgraded from B3 to Caa3

(9) Floating Rate Loan Facility in relation to Series 2 Tranche B Asset-Backed Deferrable Floating Rate Notes due 2011

Current Rating: Ca

Prior Rating: Caa2

Prior Rating Action Date: 21 January 2009, downgraded from B1 to Caa2

(10) Floating Rate Loan Facility in relation to the Series 2 Tranche C Asset-Backed Deferrable Floating Rate Notes due 2011

Current Rating: Ca

Prior Rating: Caa3

Prior Rating Action Date: 21 January 2009, downgraded from B3 to Caa3

(11) Series 4 Tranche E EUR 47,000,000 Asset Backed Deferrable Floating Rate Notes due 2012

Current Rating: Caa2

Prior Rating: Caa1

Prior Rating Action Date: 21 January 2009, downgraded from Ba1 to Caa1

(12) Series 4 Tranche F EUR 17,000,000 Asset Backed Deferrable Floating Rate Notes due 2012

Current Rating: Ca

Prior Rating: Caa2

Prior Rating Action Date: 21 January 2009, downgraded from B2 to Caa2

(13) Series 4 Tranche G USD 2,000,000 Asset-Backed Deferrable Floating Rate Notes due 2012

Current Rating: Ca

Prior Rating: B3

Prior Rating Action Date: 21 January 2009, downgraded from A2 to B3

(14) Series 4 Tranche I USD 12,000,000 Asset-Backed Deferrable Floating Rate Notes due 2012

Current Rating: Ca

Prior Rating: Caa2

Prior Rating Action Date: 21 January 2009, downgraded from B2 to Caa2

(15) Series 4 Tranche J USD 5,000,000 Asset-Backed Deferrable Fixed Rate Notes due 2012

Current Rating: Ca

Prior Rating: Caa2

Prior Rating Action Date: 21 January 2009, downgraded from B2 to Caa2

(16) Series 4 Tranche L USD 15,000,000 Asset-Backed Deferrable Floating Rate Notes due 2012

Current Rating: Ca

Prior Rating: Caa2

Prior Rating Action Date: 21 January 2009, downgraded from B2 to Caa2

(17) Series 4 Tranche M USD 15,000,000 Asset-Backed Deferrable Floating Rate Notes due 2012

Current Rating: Ca

Prior Rating: Caa1

Prior Rating Action Date: 21 January 2009, downgraded from Ba1 to Caa1

(18) Series 4 Tranche O USD 10,000,000 Asset-Backed Deferrable Floating Rate Notes due 2012

Current Rating: Ca

Prior Rating: Caa1

Prior Rating Action Date: 21 January 2009, downgraded from Ba1 to Caa1

(19) Series 4 Tranche P USD 2,000,000 Asset-Backed Deferrable Floating Rate Notes due 2012

Current Rating: Ca

Prior Rating: Caa2

Prior Rating Action Date: 21 January 2009, downgraded from B3 to Caa2

(20) Series 5 Tranche A EUR 35,000,000 Asset-Backed Floating Rate Notes due 2013

Current Rating: Ca

Prior Rating: B3

Prior Rating Action Date: 21 January 2009, downgraded from A1 to B3

(21) Series 5 Tranche F CHF 25,000,000 Asset Backed Floating Rate Notes due 2013

Current Rating: Ca

Prior Rating: B3

Prior Rating Action Date: 21 January 2009, downgraded from A1 to B3

(22) Series 5 Tranche H JPY 500,000,000 Asset-Backed Floating Rate Notes due 2013

Current Rating: Ca

Prior Rating: Caa2

Prior Rating Action Date: 21 January 2009, downgraded from Ba2 to Caa2

(23) Facility Agreement in relation to Series 5 Tranche A EUR 35,000,000 Asset-Backed Floating Rate Notes due 2013

Current Rating: Ca

Prior Rating: B3

Prior Rating Action Date: 21 January 2009, downgraded from A1 to B3

MOODY'S MAIN EDS RATING MONITORING METHODOLOGY

Moody's approach to modeling portfolio of Equity Default Swaps at closing can be broadly summarized in three steps.

Moody's identified three stock market regimes that display significantly different behaviors both in terms of likelihood of stock prices collapse and correlation structure: these are the Normal, Stress or Crash regimes, each with a related probability of occurrence.

Then for each EDS and in each market regime, Moody's inferred, with the support of various statistical studies, a probability of the threshold being hit based on: (i) the initial rating of the reference entity, (ii) the maturity of the transaction and (iii) the threshold level (between 10% and 40%).

Finally, the dependency structure (i.e., correlation) between EDS was defined -- it is mainly driven by equity return correlation and adjusted according to (i) the market regime, (ii) the industrial sector and (iii) the geographical area.

The Monte Carlo method is the most suitable to rate synthetic CDO transactions, including EDS, as it allows to take into account global and industry correlations, and portfolio heterogeneity - in terms of triggers, ratings or amounts. In each Monte Carlo trial, entities are modeled separately - subject to the correlation structure determined above -- while distressed Equity Events and recovery rate upon trigger being hit are simulated. Cumulative losses are then computed on the rated tranches.

The monitoring process is consistent with the rating methodology described above. Among other components, the monitoring committee reviews the result of two modeling approaches and three loss scenarios, as detailed below.

For entities whose Barrier is above 40%, the two approaches considered relate to the computation of the probability of hitting the trigger and are the following:

- In the first one, this probability is derived from a statistical analysis of world-wide indices;

- In the second one, it is derived from a stochastic simulation whose primary driver is the implied volatility obtained from the option market.

The three loss scenarios considered in the determination of the rating are as follows:

- One central loss scenario estimates the loss for each tranche based on the current share levels at maturity;

- Two alternative scenarios account respectively for a 20% increase and a 20% decrease of all stock prices together.

Finally, the result of the monitoring model described above has been floored to Caa1 (respectively Caa2, Caa3) for tranches for which the central loss scenario predicts no loss (respectively partial loss, wipe-out.) The floor is set one notch higher for tranches for which the Equity Events observation period has not yet started.

New York
Jian Hu
Managing Director
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

London
Christophe Larpin
Analyst
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades certain ratings of CEDO PLC
No Related Data.
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