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Rating Action:

Moody's downgrades notes and loans issued by CEDO plc.

21 Jan 2009

Approximately USD 317 million of debt affected

New York, January 21, 2009 -- Moody's Investors Service announced today it has downgraded its ratings on eight classes of notes and two loan facilities issued by CEDO PLC.

This synthetic CDO refers to a portfolio of Equity Default Swaps (EDS). The portfolio comprises 56 EDS in the so-called "Risk Portfolio", on which the SPV is protection seller, and 56 in the so-called "Insurance Portfolio", on which the SPV is protection buyer. At maturity of the transaction (in 2.8 years), 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. During the equity observation period (described below), each reference entity's stock price is observed on a weekly basis. A Hit is recorded if the spot is below 35% of the reference entity's initial stock price. The protection amount paid by the SPV to the protection buyer then corresponds to one tenth of the reference entity's initial notional amount. In other words, the protection buyer will get the full protection amount related to one reference entity if, within the observation period, the related stock price is below 35% of the price at closing for ten weeks or more.

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. The Initial Barrier (i.e. the Barrier at closing) was set at 35% for all underlying swaps, and Barriers are computed using the 50-day moving average stock price.

Today's ratings actions are the results of an adverse evolution of the underlying portfolio shares, which may be illustrated by looking at the average of the Barriers (capped at 100%) for each of the two portfolios. In general, if the transaction is performing, the difference between the average Barrier of the Risk and Insurances portfolios should not widen when being negative.

In January 2009, the average of the Barriers for the Risk Portfolio was 60% (resp. 45% for the Insurance Portfolio). In September 2008, the same indicator was 45% for the Risk Portfolio (resp. 36% for the Insurance Portfolio.) The difference between the average Barrier for the Risk and the Insurance Portfolio hence deteriorated since September 2008 (from -9% to -15%.)

As a consequence, should all stock prices remain the same until maturity, three tranches would experience partial losses and six tranches would be wiped-out -- note that this information may be subject to marginal evolution due to late substitutions, moving-average calculation and actual determination of losses. All tranches but tranches I, J are not under guarantee anymore, the Equity Events observation period has started in December 2008 (November 2008 for tranche K) and will last until the maturity of the transaction. The Equity Events observation period for tranches I and J will start in December 2009 and will last until the maturity of the transaction, such that no Equity Event related losses have occurred at this stage.

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 www.moodys.com in the Ratings Methodologies subdirectory of the Credit Policy & Methodologies directory.

Today's rating actions are as follows:

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

Current Rating: Caa1

Prior Rating: Baa3, on review for possible downgrade

Prior Rating Action Date: 10 October 2008, downgraded and left under review

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

Current Rating: Caa2

Prior Rating: B1, on review for possible downgrade

Prior Rating Action Date: 10 October 2008, downgraded and left under review

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

Current Rating: Caa3

Prior Rating: B3, on review for possible downgrade

Prior Rating Action Date: 10 October 2008, downgraded and left under review

(4) Series 2 Tranche K Non-Principal Protected Asset-Backed Fixed Rate Notes due 2011

Current Rating: Caa3

Prior Rating: B3, on review for possible downgrade

Prior Rating Action Date: 10 October 2008, downgraded and left under review

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

Current Rating: Caa2

Prior Rating: B3, on review for possible downgrade

Prior Rating Action Date: 10 October 2008, , downgraded and placed under review

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

Current Rating: Caa3

Prior Rating: B3, on review for possible downgrade

Prior Rating Action Date: 10 October 2008, downgraded and left under review

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

Current Rating: Caa1

Prior Rating: B3, on review for possible downgrade

Prior Rating Action Date: 10 October 2008, downgraded and left under review

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

Current Rating: Caa3

Prior Rating: B3, on review for possible downgrade

Prior Rating Action Date: 10 October 2008, downgraded and placed under review

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

Current Rating: Caa2

Prior Rating: B1, on review for possible downgrade

Prior Rating Action Date: 10 October 2008, downgraded and left under review

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

Current Rating: Caa3

Prior Rating: B3, on review for possible downgrade

Prior Rating Action Date: 10 October 2008, downgraded and left under review

MOODY'S MAIN EDS RATING 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 on notch higher for tranches for which the Equity Events observation period has not yet started.

Moody's will continue to monitor the transaction on a regular basis.

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 notes and loans issued by CEDO plc.
No Related Data.
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