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Rating Action:

Moody's downgrades six PREPS German SME CDOs

29 Nov 2010

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
No Related Data.
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