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Rating Action:

Moody's downgrades notes issued by Kazakh Mortgage Backed Securities 2007-1 B.V. following removal of indexation to US Dollar

03 Feb 2012

London, 03 February 2012 -- Moody's has downgraded the ratings of the notes issued by Kazakh Mortgage Backed Securities 2007-1:

....US$123M A Notes, Downgraded to Ba3 (sf); previously on Dec 13, 2011 Ba2 (sf) Placed Under Review for Possible Downgrade

....US$11.3M B Notes, Downgraded to B1 (sf); previously on Dec 13, 2011 Ba3 (sf) Placed Under Review for Possible Downgrade

....US$7.1M C Notes, Downgraded to B2 (sf); previously on Dec 13, 2011 B1 (sf) Placed Under Review for Possible Downgrade

RATINGS RATIONALE

This rating action comes as a result of the removal of the indexation of the mortgages backing this transaction to US Dollar (USD) and the redenomination of the current outstanding balances of these mortgages into Tenge at the exchange rates in effect at the date of disbursement of each mortgage. The notes of the transaction are denominated in USD and since the Tenge to USD exchange rate has increased by approximately 12% on average since the mortgages have been granted, this redenomination has resulted in an immediate 12% loss for the transaction. The transaction is also exposed to further losses in case of further depreciation of Tenge since the borrowers will now be making payments in Tenge. Therefore, the Tenge to USD exchange rate risk is unhedged in the transaction.

These changes come as a result of a judgement issued by the Supreme Court of Kazakhstan stating that the indexation of mortgage balances to the USD should not be allowed in the Kazakh mortgage market. This has caused the servicer of the transaction, BTA Ipoteka, to remove indexation not only from the mortgages securitised in this transaction, but also from its own mortgage book.

The impact of the redenomination is mitigated by the existence of the overcollaterisation in the portfolio, which has reduced from approximately 22% to 11.6% as a result of the redenomination. Therefore, the portfolio balance is still higher than the balance of the outstanding notes and the remaining overcollaterisation can be used to absorb further losses as a result of a depreciation of Tenge. The transaction further benefits from the reserve fund in the amount of USD 3.54 million (18.9% of the notes outstanding), which is held in the issuer's account with the Royal Bank of Scotland and is currently non-amortising due to breach of amortization trigger (loss of Ba2 by the parent bank of the originator). Overall, the credit enhancement under the Class A notes is 52.1%.

Currently, the notes in the transaction are amortising pro-rata; however, the amortization will turn to sequential once the transaction reaches 10% of its initial size (the transaction is currently at 13.2% of its initial size).

In its analysis, Moody's has reviewed various scenarios with regards to the amount of depreciation of Tenge and its impact on the notes. For example, should Tenge suffer a 50% depreciation after further six months of pro-rata note repayment, Class C would be expected to suffer approximately 89% loss, Class B would be expected to suffer approximately 37% loss, and Class A would be expected to be fully repaid. However, Moody's considers the probability of such a large depreciation of Tenge to be relatively low.

Moody's also assessed the extent of any additional losses which could be incurred by the transaction as a result of borrowers requesting refunds for the payments already made on the indexed basis. Currently, the servicer anticipates that the borrowers may be entitled to the compensation of any principal and interest paid on the indexed basis during the period between March 2011 (when the initial law prohibiting indexation was passed) and December 2011 (when indexation was removed from the pool). In that period, Tenge has depreciated by approximately 3%, which may need to be returned to the borrowers together with any interest accrued on the principal amounts increased by indexation during that time. Any future actions which could affect the level of compensation could negatively affect the ratings of the transaction further.

The methodologies used in this rating were Moody's Approach to Rating RMBS in Emerging Securitisation Markets -- EMEA published in June 2007, Moody's approach to rating RMBS in Europe, Middle East and Africa published in October 2009, and Moody's MILAN Methodology for rating Russian RMBS published October 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Moody's ratings address the expected loss posed to investors by the legal final maturity of the notes. Moody's ratings address only the credit risks associated with the transaction. Other non-credit risks have not been addressed, but may have a significant effect on yield to investors.

Moody's will continue to monitor the performance of this RMBS transaction. For more information, please see Moody's research on www.moodys.com or contact Moody's Client Service Desk on (+44-20) 7772 5454.

In rating this transaction, Moody's used ABSROM to model the cash flows and determine the loss for each tranche. The cash flow model evaluates all default scenarios that are then weighted considering the probabilities of the Inverse Normal distribution assumed for the portfolio default rate. On the recovery side Moody's assumes a stochastic (normal) recovery distribution which is correlated to the default distribution. In each default scenario, the corresponding loss for each class of notes is calculated given the incoming cash flows from the assets and the outgoing payments to third parties and noteholders. Therefore, the expected loss or EL for each tranche is the sum product of (i) the probability of occurrence of each default scenario; and (ii) the loss derived from the cash flow model in each default scenario for each tranche.

Moody's also reviewed several scenarios assuming significant depreciation of Tenge against the USD and additional losses incurred by the portfolio as described above.

As such, Moody's analysis encompasses the assessment of stressed scenarios.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare the rating 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 did not receive or take into account a third-party assessment on the due diligence performed regarding the underlying assets or financial instruments related to the monitoring of this transaction in the past six months.

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Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

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The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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 www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Olga Gekht
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Neal Shah
MD - Structured Finance
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
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Moody's downgrades notes issued by Kazakh Mortgage Backed Securities 2007-1 B.V. following removal of indexation to US Dollar
No Related Data.
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