EUR 244.2 million (originally rated amount) of debt securities affected
Frankfurt am Main, August 20, 2010 -- Moody's Investors Service announced today that it has downgraded the ratings
of the following classes of notes issued by PULS CDO 2006-1 plc:
EUR39.1M A1 Notes, Downgraded to Baa3 (sf); previously
on Apr 29, 2010 A1 (sf) Placed Under Review for Possible Downgrade
EUR96M A2A Notes, Downgraded to A1 (sf); previously on Jun
17, 2009 Downgraded to Aa1 (sf)
EUR24M A2B Notes, Downgraded to Ba3 (sf); previously on Apr
29, 2010 Baa1 (sf) Placed Under Review for Possible Downgrade
EUR26.5M B Notes, Downgraded to Caa3 (sf); previously
on Apr 29, 2010 Ba3 (sf) Placed Under Review for Possible Downgrade
EUR21.1M C1 Notes, Downgraded to Ca (sf); previously
on Apr 29, 2010 Caa1 (sf) Placed Under Review for Possible Downgrade
EUR5.7M C2 Notes, Downgraded to C (sf); previously on
Apr 29, 2010 Caa3 (sf) Placed Under Review for Possible Downgrade
EUR14.6M D Notes, Downgraded to C (sf); previously on
Apr 29, 2010 Ca (sf) Placed Under Review for Possible Downgrade
EUR8.35M E1 Notes, Downgraded to C (sf); previously
on Apr 29, 2010 Ca (sf) Placed Under Review for Possible Downgrade
EUR2.85M E2 Notes, Downgraded to C (sf); previously
on Apr 29, 2010 Ca (sf) Placed Under Review for Possible Downgrade
EUR6M ComboP Notes, Downgraded to C (sf); previously on Apr
29, 2010 Ca (sf) Placed Under Review for Possible Downgrade
PULS 2006-1 plc, issued in July2006, is a cash-flow
collateralized debt obligation backed by a static portfolio of subordinated
and senior unsecured debt issued by primarily German small and medium-sized
enterprises (SMEs). Today's rating actions conclude the review
of the ratings, following placement of the transaction under review
for possible downgrade on 29 April 2010. The downgrade of the notes
reflects the continuing and worse than expected credit deterioration of
the underlying portfolio. The deterioration is reflected in an
increase in the number of insolvencies, the fall of the average
rating of the performing portfolio and the increase in the number of obligors
on the watchlist maintained by the portfolio manager. The overcollateralization
of the classes has therefore diminished.
In addition, today's rating actions take into account the
correction of certain data input at the time of the last rating action
on 10 June 2009. Due to an administrative error, the swap
rate used in the modeling of the interest rate swap was lower than the
contractual swap rate. This led to an overstatement of the excess
funds available to cure principal deficiency events at the time of the
last rating action. Had this not occurred, it is likely that
the rating of the Class A to C notes may have been between one to three
notches lower and the other classes of notes may have been up to one notch
The transaction has experienced a further increase in defaults and impairments
from 6 obligors, totaling EUR 36.5 million (approximately
14% of the initial portfolio), at the time of last rating
action to 11 obligors, totalling EUR 58 million (approximately 22%
of the initial portfolio). None of the defaulted obligations have
returned any recovery to date due to the length of the German workout
process. However, this is in line with Moody's expectations.
Only one default has occurred on senior debt. The portfolio contains
approximately EUR 30 million Caa assets. Deterioration in the portfolio
is also indicated by the watchlist maintained and reported by the portfolio
manager who monitors the individual issuers in the portfolio. EUR
50 million of the portfolio are currently on this watchlist, EUR
20 million of these watchlisted obligations are assumed to be Caa in Moody's
The trustee reports an increase in the Principal Deficiency Ledger (PDL)
from approximately EUR 26 million at time of last rating action to approximately
EUR 35 million, excluding PDL events of the current reporting period.
The PDL is a measure representing the cumulative nominal amount of defaults
in a transaction. It is cured by the sequential redemption of the
notes from excess available funds until the PDL has been reduced to zero.
Moody's anticipates ordinary excess available funds to be less than
EUR 1 million per semiannual payment date going forward. For this
reason the excess spread in the transaction is limited and it is unlikely
that substantial portions of the PDL will be paid down. The transaction
has approximately 3 years to the scheduled maturity.
The current portfolio has the following distribution by ratings in Moody's
assessment Baa3 2.6%, Ba2 15.5%,
Ba3 8.1%, B1 28.8%, B2 12.7%,
B3 13.7%, Caa1 11.2%, Caa3 7.3%.
The two largest sector concentrations are in the Buildings and Real Estate
with approx. 24% and Chemicals Plastics and Rubber with
12.4%. Approximately two thirds of the portfolio
is subordinated debt. The portfolio's diversity has reduced
due to defaults and full and partial early amortizations at par.
After excluding amortized, insolvent, credit impaired and
potentially credit impaired obligors, the number of portfolio obligors
Moody's analyzed the underlying collateral pool to have a weighted
average default probability to scheduled maturity of approximately 16%
corresponding to a B3 weighted average rating. Moody's focussed
on a weighted average recovery rate upon default on senior debt of 30%
and a recovery rate of 0% on subordinated debt. The diversity
score, derived from the individual, sectorial and regional
concentrations in the portfolio, is 17.
Moody's also performed a number of sensitivity analyses with respect to
each of these two rating setups, including consideration of the
scenario that the weakest obligors in the portfolio (Caa bucket) jointly
default or jointly migrate to B3 immediately. Moody's also
considered the effect of an upside recovery scenario with 40% recovery
on the senior debt as well as a downside recovery scenario with 15%
senior recovery rate. Increasing the recovery improves the model
results on the classes C1 and above by less than half a notch.
Decreasing the recovery worsens the model results for classes C1 and above
by less than one notch. The effect of migration to B3 on the senior
classes is one to two notches. Default of all of the Caas has more
than 2 notches impact on the classes C2 and above. Classes C2 and
below are not affected by these sensitivity runs. Furthermore,
various stress scenarios were run, including heavily notching the
largest asset in the portfolio, and stressing by two notches up
to 30% of the largest assets in the portfolio.
In addition to the quantitative factors that are explicitly modelled,
qualitative factors are part of rating committee considerations.
These qualitative factors include, among other elements, an
assessment of the collateral manager track record and practices.
In particular, Moody's looked at the quality of information
provided by the manager, its interpretation of the documentation
and level of diligence in the implementation of the transaction criteria.
Moody's considers as well the structural protections in each transaction,
the recent deal performance in the current market environment, the
legal environment, and specific documentation features. All
information available to rating committees, including macroeconomic
forecasts, input from other Moody's analytical groups, market
factors, and judgments regarding the nature and severity of credit
stress on the transactions, may influence the final rating decision.
The action relies on financial data received annually for a majority of
obligors in the pool from the end of 2009. This financial data
was used in the RiskCalc model, an econometric model developed by
Moody's KMV in order to assess the credit quality of obligors in the pool.
The results obtained from the RiskCalc model have been translated to Moody's
rating scale and adjusted by one notch where necessary in order to compensate
for the absence of credit indicators such as rating reviews, outlooks
and adjustments factoring in cyclical developments in the economy.
Moody's also incorporated information provided by the manager in the latest
investor report to account for more recent information on the performance
of the underlying obligors. Moody's has considered the impact
of potential further deterioration arising from updates to credit estimates
based on less recent (2008) financial data, which make up one third
of the portfolio.
Moody's notes that this transaction is subject to a high level of
macroeconomic uncertainty, as primarily evidenced by uncertainties
regarding credit conditions and refinancing opportunities in the general
economic environment. The CDO notes' performance may also
be impacted by the portfolio managers' divestment and termination
The principal methodologies used in rating and monitoring PULS CDO 2006-1
plc were Moody's Approach to Rating Collateralized Loan Obligations published
in August 2009 and Moody's Approach to Rating CDOs of SMEs in Europe published
in February 2007. Other methodologies and factors that may have
been considered in the process of rating this issue can also be found
on Moody's website.
Under this methodology, Moody's relies on a simulation based
framework, implemented via CDOROM2.6TM, to generate
default and recovery scenarios for each asset in the portfolio,
and computes the associated loss to each class of notes in the structure
via Moody's EMEA Cash-Flow model.
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
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
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purpose of maintaining
a credit rating.
Moody's Investors Service may have provided Ancillary or Other Permissible
Services 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.
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 Investors Service adopts all necessary measures so that the information
it uses in assigning a credit rating is of sufficient quality and from
reliable sources; however, Moody's Investors Service does not
and cannot in every instance independently verify, audit 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.
Structured Finance Group
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
Moody's downgrades notes issued by PULS CDO 2006-1 plc
An der Welle 5
Frankfurt am Main 60322