EUR 1.6 billion of securities affected
Frankfurt am Main, November 29, 2010 -- Moody's Investors Service announced today the following rating actions
on 18 classes of notes issued by six PREPS vehicles:
Issuer: European Private Funding I Limited Partnership
EUR220M Senior Notes Bond, Downgraded to Caa3 (sf); previously
on Oct 14, 2010 Baa2 (sf) Placed Under Review for Possible Downgrade
Issuer: PREPS 2004-2 Limited Partnership
EUR393M A1 Bond, Downgraded to Aa3 (sf); previously on Oct
14, 2010 Aaa (sf) Placed Under Review for Possible Downgrade
EUR75M A2 Bond, Downgraded to Aa3 (sf); previously on Oct 14,
2010 Aaa (sf) Placed Under Review for Possible Downgrade
EUR46M B1 Bond, Downgraded to B1 (sf); previously on Oct 14,
2010 Baa3 (sf) Placed Under Review for Possible Downgrade
EUR40M B2 Bond, Downgraded to B1 (sf); previously on Oct 14,
2010 Baa3 (sf) Placed Under Review for Possible Downgrade
Issuer: PREPS 2005-1 Limited Partnership
EUR175M A1 Notes, Downgraded to Baa3 (sf); previously on Oct
14, 2010 Aa3 (sf) Placed Under Review for Possible Downgrade
EUR60M A2 Notes, Downgraded to Baa3 (sf); previously on Oct
14, 2010 Aa3 (sf) Placed Under Review for Possible Downgrade
EUR47M B Notes, Downgraded to Caa3 (sf); previously on Oct
14, 2010 B1 (sf) Placed Under Review for Possible Downgrade
Issuer: PREPS 2005-2 plc
EUR217M A1 Notes, Downgraded to B2 (sf); previously on Oct
14, 2010 Ba1 (sf) Placed Under Review for Possible Downgrade
EUR53M A2 Notes, Downgraded to B2 (sf); previously on Oct 14,
2010 Ba1 (sf) Placed Under Review for Possible Downgrade
EUR41.5M B1 Notes, Confirmed at Caa3 (sf); previously
on Oct 14, 2010 Caa3 (sf) Placed Under Review for Possible Downgrade
EUR12.5M B2 Notes, Confirmed at Caa3 (sf); previously
on Oct 14, 2010 Caa3 (sf) Placed Under Review for Possible Downgrade
Issuer: PREPS 2006-1 plc
EUR238.1M A1 Notes, Downgraded to Ba1 (sf); previously
on Aug 5, 2010 Aa3 (sf) Placed Under Review for Possible Downgrade
EUR0.9M A2 Notes, Downgraded to Ba1 (sf); previously
on Aug 5, 2010 Aa3 (sf) Placed Under Review for Possible Downgrade
EUR40M B1 Notes, Downgraded to Ca (sf); previously on Aug 5,
2010 B2 (sf) Placed Under Review for Possible Downgrade
EUR9M B2 Notes, Downgraded to Ca (sf); previously on Aug 5,
2010 B2 (sf) Placed Under Review for Possible Downgrade
Issuer: PREPS 2007-1 plc
EUR186M A1 Notes, Downgraded to Caa1 (sf); previously on Apr
21, 2010 Downgraded to Ba1 (sf)
EUR35M B1 Notes, Downgraded to Ca (sf); previously on Apr 21,
2010 Downgraded to Caa3 (sf)
RATINGS RATIONALE
The six PREPS transactions are a cash flow CDOs exposed to portfolios
of profit participation agreements ("Genussrechte") without loss participations
and/or subordinated loan agreements. All assets included in those
portfolios are bullet subordinated loans primarily extended to German
small and medium-sized obligors. Capital Efficiency Group
is acting as a financial advisor or investment services provider and CorpRec
Advisory AG as recovery manager in Germany, Austria and Switzerland
for those six transactions.
Today's rating actions are a response to the credit deterioration of the
underlying pools of the six PREPS transactions beyond Moody's previous
assumptions upon last monitoring action. This deterioration is
illustrated in detail below for each specific transaction. Those
actions also reflect the anticipated further deterioration suggested by
most recent information available about each pool obligors as some of
them will have to refinance their debt in the coming months.
In its analysis, Moody's applied standard assumptions applicable
to CLOs rating methodology and deal specific outlook and pool characteristics.
Under these assumptions, Moody's applied stresses including
an increase in the default probability of each obligor to reflect cyclical
economic stress and future default expectations based on past pool performance,
name specific forward looking adjustments, and an increased inter-asset
correlation (from 3% to 5%) in order to reflect the borrower
concentration in Germany. These assumptions reflect Moody's
expectations that default rates for these six pools are likely to remain
at elevated levels despite improvements in the German economy.
In addition, due to the subordinated position of the loans in the
obligors' capital structure, Moody's assumes a zero
recovery rate upon asset default.
In reaching its ratings decisions, Moody's took into account
the elevated potential for refinancing difficulties likely to be faced
by a substantial number of the weaker obligors over the coming years to
scheduled maturity. This risk has been assessed primarily from
qualitative information on individual obligors provided in the latest
investor report and by the investment services provider and recovery manager.
In addition, Moody's notes that the transactions' ability
to generates material excess spread cash flows has been diminished.
This trend is likely to continue as further defaults materialize.
This will limit substantially the ability of transaction to cure the substantial
PDL balances. Moody's completed its analysis by further sensitivity
runs, including an additional default probability stress of one
notch per obligor and a less conservative recovery rate scenario where
a 70% loss was assumed on the obligors modeled as defaulted.
Moody's notes as well that most of the PREPs portfolios show high
concentration levels. In order to measure the risk associated with
low granularity, Moody's conducted breakeven analyses by computing
the number of borrower defaults that could be sustained before hitting
a given class of notes. The volatility of the rating outputs in
such sensitivity runs was deemed consistent with the current ratings in
light of the collateralization levels available on the different tranches.
Sources of additional performance uncertainties for the six PREPs transactions
include:
1) Low portfolio granularity: The performance of the portfolio depends
to a large extent on the credit conditions of a few large obligors that
are rated non investment grade, especially when they experience
jump to default. Due to the pool's lack of granularity, Moody's
supplements its base case scenario with individual scenario analysis.
2) Potential for elevated refinancing difficulty regarding the subordinated
debt instruments in this portfolio, particularly among obligors
with weaker credit quality. This risk is more pronounced for the
transactions scheduled to mature in the next two years.
The principal methodologies used in rating the notes were "Moody's Approach
to Rating Collateralized Loan Obligations" published in August 2009,
"Moody's Approach to Rating Corporate Collateralized Synthetic Obligations"
published in September 2009, and "Moody's Approach to Rating CDOs
of SMEs in Europe" published in February 2007.
Under these methodologies, Moody's relies on a simulation based
framework. Moody's therefore used CDOROM, to generate default
and recovery scenarios for each asset in the portfolio. Then Moody's
EMEA Cash-Flow model was used in order to compute the associated
loss to each tranche in the CDO structure. In addition, Moody's
relied on qualitative judgment based on current and expected overcollateralization
of each rated tranches in the light of their respective upcoming maturity
The underlying portfolio of European Private Funding I currently totals
EUR 198 million with exposure to 29 obligors as per the investors report
dated 30 September 2010. The senior classes have received amortization
payments. The collateral obligations mature in May 2011 European
Private Funding I has EUR 15 million uncured principal deficiencies and
EUR 39 million of principal deficiencies have previously been cured.
Principal deficiencies include early terminations repaid at par.
6% of the initial pool are insolvent to date and EUR 15 million
of distressed sales have been reported. Moody's considers
a further 14.1% of assets in the original pool to be at
acute risk of default or likely to experience elevated difficulties in
refinancing the PREPS loans. In addition, the weighted average
credit quality of the remaining portfolio is currently at B1. The
credit quality is based on KMV RiskCalc Credit Estimates notched to Moody's
rating scale and further notching as detailed above to account for Moody's
pool specific outlook.
The underlying portfolio of PREPS 2004-2 currently totals EUR 533
million with exposure to 64 obligors as per the investors report dated
10 September 2010. The senior classes have received amortization
payments. The collateral obligations mature in December 2011.
PREPS 2004-2 has EUR 10 million uncured principal deficiencies
and EUR 73 million of principal deficiencies have previously been cured.
Principal deficiencies include early terminations repaid at par.
8.6% of the initial pool are insolvent to date and EUR 25
million of distressed sales have been reported. Moody's considers
a further 4.1% of assets in the original pool to be at acute
risk of default or likely to experience elevated difficulties in refinancing
the PREPS loans. In addition, the weighted average credit
quality of the remaining portfolio is currently at B1. The credit
quality is based on KMV RiskCalc Credit Estimates notched to Moody's
rating scale and further notching as detailed above to account for Moody's
pool specific outlook.
The underlying portfolio of PREPS 2005-1 currently totals EUR 253
million with exposure to 47 obligors as per the investors report dated
4 November 2010. The senior classes have received amortization
payments. The collateral obligations mature in August 2012.
PREPS 2005-1 has EUR 26 million uncured principal deficiencies
and EUR 35 million of principal deficiencies have previously been cured.
Principal deficiencies include early terminations repaid at par.
10.2% of the initial pool are insolvent to date and EUR
13 million of distressed sales have been reported. Moody's
considers a further 9.9% of assets in the original pool
to be at acute risk of default or likely to experience elevated difficulties
in refinancing the PREPS loans. In addition, the weighted
average credit quality of the remaining portfolio is currently at B2.
The credit quality is based on KMV RiskCalc Credit Estimates notched to
Moody's rating scale and further notching as detailed above to account
for Moody's pool specific outlook.
The underlying portfolio of PREPS 2005-2 currently totals EUR 282
million with exposure to 59 obligors as per the investors report dated
8 September 2010. The senior classes have received amortization
payments. The collateral obligations mature in December 2012.
PREPS 2005-2 has EUR 42 million uncured principal deficiencies
and EUR 36 million of principal deficiencies have previously been cured.
Principal deficiencies include early terminations repaid at par.
13.1% of the initial pool are insolvent to date and EUR
13 million of distressed exchanges have been reported. Moody's
considers a further 12% of assets in the original pool to be at
acute risk of default or are likely to experience elevated difficulties
in refinancing the PREPS loans. In addition, the weighted
average credit quality of the remaining portfolio is currently at B2.
The credit quality is based on KMV RiskCalc Credit Estimates notched to
Moody's rating scale and further notching as detailed above to account
for Moody's pool specific outlook.
The underlying portfolio of PREPS 2006-1 currently totals EUR 265
million with exposure to 58 obligors as per the investors report dated
18 October 2010. The senior classes have received amortization
payments. The collateral obligations mature in July 2013.
PREPS 2006-1 has EUR 46 million uncured principal deficiencies
and EUR 20 million of principal deficiencies have previously been cured.
Principal deficiencies include early terminations repaid at par.
11.2% of the initial pool are insolvent to date and EUR
19 million of distressed sales and exchanges have been reported.
Moody's considers a further 4.1% of assets in the
original pool to be at acute risk of default or likely to experience elevated
difficulties in refinancing the PREPS loans. In addition,
the weighted average credit quality of the remaining portfolio is currently
at B1. The credit quality is based on KMV RiskCalc Credit Estimates
notched to Moody's rating scale and further notching as detailed
above to account for Moody's pool specific outlook.
The underlying portfolio of PREPS 2007-1 currently totals EUR 189
million with exposure to 48 obligors as per the investors report dated
7 September 2010. The senior classes have received amortization
payments. The collateral obligations mature in March 2014.
PREPS 2007-1 has EUR 41 million uncured principal deficiencies
and EUR 18 million of principal deficiencies have previously been cured.
Principal deficiencies include early terminations repaid at par.
15.3% of the initial pool are insolvent to date and EUR
6 million of distressed sales have been reported. Moody's
considers a further 8.4% of assets in the original pool
to be at acute risk of default or likely to experience elevated difficulties
in refinancing the PREPS loans. In addition, the weighted
average credit quality of the remaining portfolio is currently at B2.
The credit quality is based on KMV RiskCalc Credit Estimates notched to
Moody's rating scale and further notching as detailed above to account
for Moody's pool specific outlook.
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 six 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 information; and confidential and proprietary Moody's Analytics
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
Service(s) 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 adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify 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.
Frankfurt am Main
Matthias Wahl
Associate Analyst
Structured Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Paris
Florence Tadjeddine
VP - Senior Credit Officer
Structured Finance Group
Moody's France SAS
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
Moody's downgrades six PREPS German SME CDOs
