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Rating Action:

Moody's downgrades senior notes issued by ICO Mediacion II AyT, a balance sheet CLO

13 Jun 2012

London, 13 June 2012 -- Moody's Investors Service announced today that it has downgraded the rating of senior notes issued by ICO Mediacion II Ayt, F.T.A. The notes affected by today's rating action are as follows:

....EUR 14, 864.7 million Class A Notes (current balance EUR 6,282.6 million), Downgraded to A2 (sf); previously on April 27, 2012 Aa2 (sf) Placed under Review for Possible Downgrade

This cash balance sheet CDO which closed in July 2010 has one rated class of notes with an underlying collateral pool composed entirely of senior unsecured loans to around 90 Spanish financial institutions. Credit enhancement is provided through over-collateralisation as well as sizeable reserve funds currently amounting to c 80% of the rated notes. The servicer and account bank roles are performed by Instituto de Credito Oficial (ICO) which is fully owned and guaranteed by the Spanish government. ICO also provides an interest rate swap to the issuer to primarily hedge the basis risk between the interest receipts on the underlying collateral loans and coupon payments on the notes.

RATINGS RATIONALE

Today's downgrade primarily reflects the un-remedied breach of credit triggers in the transaction pursuant to the ratings downgrade of ICO from A1/P-1 to A3/P-2 on 15 February 2012 and the worsening credit quality of the pool as detailed below.

The May 2012 investor report reveals that the during the period November 2011 - May 2012, the pool amortised by 16.1% to EUR 14,286.6 million, with Class A notes amortising by 30.5% to EUR 6,282.6 million. The largest five publicly rated obligors which constitute c 47% of the pool by value currently have a weighted average Baa2 rating after incorporating a one/two notch stress for negative outlook/review for downgrade respectively as applicable on their current public ratings based on Moody's rating methodology. This compares to an average A3 rating in April 2012 and average A2 rating at closing calculated in a similar fashion.

The rated notes benefit from substantial credit enhancement provided by the EUR 8,004 million over-collateralization in the underlying loan pool and the EUR 5 billion reserve funds in the transaction. However these reserve funds, together with the other cash amounts in the transaction, continue to held by ICO (A3/P-2), currently in breach of the A2/P-1 minimum rating requirement as account bank.

Moody's considers that the obligors in the collateral pool are highly correlated with one another given that (i) while mitigated somewhat in the case of BBVA and Santander by their international operations, they largely run domestic businesses, thereby being highly exposed to systemic issues such as adverse operating conditions, reduced creditworthiness of the Spanish sovereign, continued restricted access to market funding, and rapidly deteriorating asset quality and (ii) the Spanish financial sector is going through an intense consolidation process through mergers. Furthermore, ICO, the provider of credit support for this transaction via the reserve funds held in the account bank, is also highly correlated with the collateral pool through its roles as the Spanish State's financial agency and providing funding to Spanish SMEs through most of the financial institutions operating in Spain. Moody's notes that this latter correlation is a key consideration in its current analysis, now that the de-linkage mechanism envisaged by the A2/P-1 credit trigger on the account bank has been eroded by the un-remedied breach of the credit trigger.

In its review for downgrade on 27 April 2012, Moody's had noted that absent remedial actions to find a guarantor or transferee satisfying the A2/P-1 requirements, the ratings of ICO Mediacion II AyT notes would be considered linked to the credit quality of ICO. Moody's notes that the trigger breach has not yet been remedied. Accordingly, the Class A notes are now rated A2; the one notch uplift from ICO's rating derives from the significant credit enhancement provided by the pool overcollateralization and the reserve fund.

Moody's notes that as the Euro area crisis continues, this transaction remains exposed to the uncertainties of credit conditions in the European economy especially as 100% of the portfolio is exposed to financial institutions domiciled in Spain. The deteriorating creditworthiness of euro area sovereigns as well as the weakening profile of the global banking sector could negatively impact the rating of the notes. Pursuant to the downgrade of the Spanish sovereign, Moody's lowered the Class A Notes rating from Aaa(sf) to Aa2(sf) in February 2012. For more information please refer to the Rating Implementation Guidance published on 13 February 2012 "How Sovereign Credit Quality May Affect Other ratings". Please also refer to Special Comments "Key Drivers of Spanish Bank Rating Actions" published on 17 May 2012 and "Rating Euro Area Sovereign Governments Through Extraordinary Times - Implications of Spain's bank recapitalisation needs and the rising risk of a Greek Exit" published on 08 June 2012.

Moody's did not run a separate loss and cash flow analysis; in addition, key modelling assumptions, sensitivities, cash flow analysis and stress scenarios have not been updated as this downgrade has been primarily driven by the un-remedied breach of credit triggers in the transaction coupled with a recent two notch decline in the weighted average rating of c 47% of the pool as noted above.

The principal methodology used in this rating was "Moody's Approach to Rating Corporate Collateralized Synthetic Obligations" published in September 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

In addition to the quantitative factors that are explicitly modelled, qualitative factors are part of the rating committee considerations. These qualitative factors include the structural protections in each transaction, the recent deal performance in the current market environment, the legal environment, specific documentation features, the collateral manager's track record, and the potential for selection bias in the portfolio. 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.

REGULATORY DISCLOSURES

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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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.

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Raja Iyer
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

Neelam S. Desai
Senior Vice President
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
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Canary Wharf
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JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades senior notes issued by ICO Mediacion II AyT, a balance sheet CLO
No Related Data.
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