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Rating Action:

Moody's downgrades notes issued by PULS CDO 2007-1 Limited

Global Credit Research - 20 Aug 2010

EUR 269.1 million (originally rated amount) of debt securities affected

London, 20 August 2010 -- Moody's Investors Service announced today that it has downgraded the ratings of the following classes of notes issued by PULS CDO 2007-1 Limited:

EUR40M A1 Notes, Downgraded to Baa2 (sf); previously on Jun 17, 2009 Downgraded to Aa3 (sf)

EUR123.5M A2A Notes, Downgraded to Aa2 (sf); previously on Jun 17, 2009 Downgraded to Aa1 (sf)

EUR30.9M A2B Notes, Downgraded to Ba2 (sf); previously on Jun 17, 2009 Downgraded to A2 (sf)

EUR22.2M B Notes, Downgraded to Caa1 (sf); previously on Jun 17, 2009 Downgraded to Baa3 (sf)

EUR28.5M C Notes, Downgraded to Ca (sf); previously on Jun 17, 2009 Downgraded to B1 (sf)

EUR16.8M D Notes, Downgraded to C (sf); previously on Jun 17, 2009 Downgraded to Caa1 (sf)

EUR7.2M E Notes, Downgraded to C (sf); previously on Jun 17, 2009 Downgraded to Caa3 (sf)

RATINGS RATIONALE

PULS 2007-1 Limited, issued in April 2007, 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). 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 modelling of the interest rate swap was lower than the contractual swap rate. This led to an overstatement of the excess funds available to cure the failing coverage tests 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 lower.

The transaction has experienced a further increase in defaults and impairments from 8 obligors, totalling EUR 37 million (approximately 12% of the initial portfolio), at the time of last rating action, to 15 obligors, totalling EUR 70 million (approximately 23% of the initial portfolio). None of the defaulted obligations have returned any recovery to date due to the lengthy workout process of the German SME bonds. However, this is in line with Moody's expectations. Five defaults were occurred on subordinated debt; the remaining ten defaults on senior debt. Deterioration in the portfolio is also indicated by the watchlist maintained and reported by the portfolio manager who monitors the individual borrowers in the portfolio. EUR 78.3 million of the portfolio are currently on this watchlist. EUR 42.3 million of these watchlisted obligations are assumed to be Caa in Moody's analysis.

The trustee reports the Class D and Class E OC test ratios both failing and decreasing. The current reported Class D and Class E OC ratios are 102.3% and 98.8%, compared to 104.9% and 101.9% in the last rating action, respectively. Such OC test failure may be cured by the redemption of the senior notes from excess spread. Moody's anticipates ordinary excess spread to be less than EUR 1 million per quarterly payment date going forward. Due to the limited availability of excess spread in the transaction, Moody's views that it is unlikely that the current OC test failure will be cured. The transaction has approximately 4 years to the scheduled maturity.

The current portfolio has the following rating distribution in Moody's assessment (excluding amortisations and defaults in the pool): 24% Ba2, 2.4% Ba3, 25.2% B1,19.2% B2, 8.9% B3,9.7% Caa1, 4.8% Caa2 and 5.8% Caa3. The two largest sector concentrations are in the Automobile and Buildings and Real Estate sectors, representing 18% and 16% of the current pool, respectively. Approximately half 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 or insolvent obligors, the number of portfolio obligors is 40.

Moody's analyzed the underlying collateral pool to have a weighted average default probability to scheduled maturity of approximately 19.8%, corresponding to a B3 weighted average rating. Moody's focussed on a weighted average recovery rate upon default on senior debt of 30% and 0% on subordinated debt. The diversity score, derived from the individual, sectorial and regional concentrations in the portfolio, is 22.

Moody's also performed a number of sensitivity analyses including consideration of the scenario that the weakest obligors in the portfolio (Caa bucket) jointly default (credit deterioration) or jointly migrate to B3 (credit improvement) immediately. Moody's also considered the effect of an upside recovery scenario of 40% recovery on the senior debt as well as a downside recovery scenario of 15% senior recovery rate. Increasing the assumed recovery improves the model results on the classes B and above by half a notch to less than 2 notches. Decreasing the recovery worsens the model results for classes B and above by one to two notches. The effect of migration to B3 on the senior classes is one to two notches. Default of the whole Caa bucket in the portfolio has more than 2 notches impact on the classes B and above. Classes C and below are not meaningfully 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 strategies.

The principal methodologies used in rating and monitoring PULS CDO 2007-1 Limited 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 issuer 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 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 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.

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

London
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 Investors Service Ltd.
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Canary Wharf
London E14 5FA
United Kingdom

Moody's downgrades notes issued by PULS CDO 2007-1 Limited
No Related Data.
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