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Rating Action:

Moody's downgrades some ratings in Goodwood Gold Limited UK SME ABS

04 Sep 2012

London, 04 September 2012 -- Moody's Investors Service has today downgraded the ratings of 4 notes and one Credit Default Swap (CDS) and confirmed the ratings of 6 notes and 3 CDSs in Goodwood Gold Ltd. This synthetic ABS transaction issued in 2007 is backed by a granular portfolio of loans to small and medium-sized enterprises (SMEs) located across the UK that were originated by Lloyds TSB Bank plc (A2/P-1). Today's rating action concludes the review that Moody's initiated on 16 November 2011 due to worse than expected collateral performance.

Today's rating confirmations reflect Moody's conclusion that negative collateral performance has recently and marginally improved and that, for all except Class D, it has been offset by the benefits of a strong excess spread mechanism and improving credit enhancement levels. Today's downgrades of the GBP-denominated certificates reflects their increased linkage to the rating of Lloyds TSB (A2/P1) in its capacity as collateral deposit bank, following a recent transaction amendment that removed the obligation to maintain a P-1 rating for the entity performing this role.

RATINGS LIST

Issuer: Goodwood Gold Limited

....GBP76M A1 Certificate, Downgraded to A2 (sf); previously on Nov 16, 2011 Aa1 (sf) Placed Under Review for Possible Downgrade

....GBP55M B1 Certificate, Downgraded to A2 (sf); previously on Nov 16, 2011 A1 (sf) Placed Under Review for Possible Downgrade

....GBP11M D CDS Certificate, Downgraded to Ba2 (sf); previously on Nov 16, 2011 Ba1 (sf) Placed Under Review for Possible Downgrade

....GBP14M D1 Certificate, Downgraded to Ba2 (sf); previously on Nov 16, 2011 Ba1 (sf) Placed Under Review for Possible Downgrade

....EUR19.6M D2 Certificate, Downgraded to Ba2 (sf); previously on Nov 16, 2011 Ba1 (sf) Placed Under Review for Possible Downgrade

....EUR28M A2 Certificate, Confirmed at Aa1 (sf); previously on Nov 16, 2011 Aa1 (sf) Placed Under Review for Possible Downgrade

....GBP25M B CDS Certificate, Confirmed at A1 (sf); previously on Nov 16, 2011 A1 (sf) Placed Under Review for Possible Downgrade

....EUR16.1M B2 Certificate, Confirmed at A1 (sf); previously on Nov 16, 2011 A1 (sf) Placed Under Review for Possible Downgrade

....GBP25M C CDS Certificate, Confirmed at Baa2 (sf); previously on Nov 16, 2011 Baa2 (sf) Placed Under Review for Possible Downgrade

....GBP33M C1 Certificate, Confirmed at Baa2 (sf); previously on Nov 16, 2011 Baa2 (sf) Placed Under Review for Possible Downgrade

....EUR42.7M C2 Certificate, Confirmed at Baa2 (sf); previously on Nov 16, 2011 Baa2 (sf) Placed Under Review for Possible Downgrade

....GBP15.5M E CDS Certificate, Confirmed at B2 (sf); previously on Nov 16, 2011 B2 (sf) Placed Under Review for Possible Downgrade

....GBP19.5M E1 Certificate, Confirmed at B2 (sf); previously on Nov 16, 2011 B2 (sf) Placed Under Review for Possible Downgrade

....EUR26.6M E2 Certificate, Confirmed at B2 (sf); previously on Nov 16, 2011 B2 (sf) Placed Under Review for Possible Downgrade

RATINGS RATIONALE

Today's rating confirmations reflect Moody's conclusion that negative collateral performance has recently and marginally improved and that, for all securities except Class D, it has been offset by the benefits of a strong excess spread mechanism and improving credit enhancement levels. Moody's review specifically considered positively: (1) the strength of the annually replenishing synthetic credit enhancement, whose size is larger than that on similarly rated securities in peer transactions, (2) the stable levels of credit enhancement provided by subordination, which result from the absence of any loss allocation to any of the rated notes to date, although credit enhancement is lower than peers as the transaction is still in its pro-rata amortization phase, (3) the existence of a trigger to switch to a sequential amortization phase as soon as defaults exceed 70% of the annual threshold available, (4) the recently upward trending cumulative recovery rates, although these remain lower than originally expected, and (5) the recently improving trends of the internal average Basel II default probability and -- except for Class D -- the increase in the total credit enhancement adjusted for future expected defaults.

The downgrade of Class D securities resulted from the decreasing of its credit enhancement after accounting for future losses on the performing pool. For this class only, positive credit trends were not able to offset the main credit weaknesses that Moody's has assessed for the transaction as a whole: (1) the high balance of outstanding defaults and assets which are reported to have a Basel II default probability of 100%, (2) the slower than expected amortization of the portfolio, and (3) the lower than expected recovery rates.

The downgrade of the ratings of the certificates denominated in GBP was prompted by the downgrade of Lloyds TSB Bank plc's ratings to A2/P-1 on 21 June 2012 and the subsequent amendment of the transaction documentation that removed the requirement to replace the GBP deposit bank following the loss of its A1/P-1 rating on 3 May 2012. That resulted in increased rating linkage between the GBP certificates and Lloyds because the amendment of the transaction documentation links the creditworthiness of the GBP deposit that serves to repay the certificates to that of the deposit bank. In consequence, any further deterioration of the ratings of the deposit bank may further negatively impact the ratings of the GBP certificates. However, the replacement trigger for the EUR deposit remains in effect following the amendment, so there was no negative action on certificates denominated in that currency. The GBP-denominated CDSs are unfunded and therefore were not affected either by the amendment.

-- PERFORMANCE

The cumulative default rate in this transaction is higher than previously expected and substantially higher than that observed on other SME ABS transaction backed by assets from the same originator. According to the investor report dated 20 July 2012, cumulative defaults since closing amount to 9.2% of the original pool balance excluding replenishments (6.3% if considering the original balance plus replenishments), which correspond to a Ba2 rating proxy for the creditworthiness of the collateral. The historical recovery rate amounts to approximately 66% of the defaulted loan balances, according to the same report. The transaction has been amortizing since the end of the replenishment period in January 2010, at which point approximately 1.4bn of replenishments had occurred since closing. Since the beginning of the amortization period, the portfolio has amortized to 62% of its initial size.

The transaction benefits from an excess spread mechanism which is relatively stronger than that of other UK SME transactions from the same originator. The synthetic excess spread is used to replenish - up to 1.5% of the outstanding pool balance - a first loss piece that is available to absorb losses on the portfolio. Due to the amount of available excess spread, the rated notes have not been allocated any losses to date despite the elevated default rates observed in the pool. The efficiency of the synthetic excess spread mechanism in absorbing losses to date has also benefited from the relatively even distribution of defaults over time. As a result, no more than 70% of the first loss piece has ever been absorbed by pool credit events in any given year and therefore the transaction has never breached the trigger that would make it switch to a sequential amortization. The transaction is amortizing on a pro rata basis but will switch to sequential amortization if more than 70% of the yearly synthetic excess spread is absorbed or once the portfolio has amortized to 50% of its original amount.

-- KEY REVISED ASSUMPTIONS: CUMULATIVE DEFAULT, VOLATILITY AND RECOVERY

Moody's has updated its default collateral performance expectation and, in its base case, now assumes a mean default rate of 9.7% over a 4 year expected weighted average life for the performing part of the portfolio, which corresponds to a Ba3 default rating proxy. This assumption reflects the collateral performance to date and the expected future performance of the pool in the current cycle in light of Moody's macroeconomic outlook for the UK and the recently improving average internal Basel II default probability of the portfolio. The rating agency took into account the pools' composition, making positive adjustments for the transaction's exposure to the countercyclical Beverage, Food & Tobacco as well as Healthcare & Pharmaceuticals sectors (about 52% of the performing pool balance) and negative adjustments for the concentration of around 17% of in the highly cyclical Construction & Building sector. Moody's has further made negative adjustments to account for 100% of the portfolio being micro SMEs, which exhibit higher default rates than larger SMEs on average.

After taking into account the credit event definition and the non performing part of the portfolio, Moody's expects an overall cumulative default rate of 15.2% of the total pool that corresponds to a B1 rating proxy for the collateral. This revised expectation is broadly in line with the assumed default rate at the time of the previous rating review in November 2009. The assumption reflects a stress of 5% applied to the default rate for the performing pool (about 93% of the total pool) to account for restructuring being included in the credit event definition of this transaction. In addition, 4.9% of the total pool have been reported to be outstanding defaults and 2.4% of the portfolio to be currently performing but with 100% Basel II default probability. Moody's has compared historical Basel II default rates in the portfolio with actual default rates and observed that at most one-third of defaults have actually become credit events, due in part to the 180 day overdue credit event definition specific to this transaction. Accordingly, Moody's has assumed that 0.8% of the portfolio will default with certainty, which corresponds to a default rate of about 33% on the assets with 100% Basel II default probability.

In the absence of valid maturity or average life data for the portfolio, Moody's has assumed a weighted average life of approximately 4 years for the current portfolio. This assumptions is based on the portfolio's amortization to date, its comprising of about 40% of loans with bullet maturities, and the transaction's legal final maturity of January 2025, before which Moody's expects the portfolio to have fully amortized.

Moody's combined a normal-inverse default distribution with stochastic recovery rate scenarios to determine the losses in each of the scenarios on the notes. Based on the performing portfolio composition, Moody's has determined a standard deviation of 5.3% for its default distribution, which in light of the distribution's mean assumption translates to a coefficient of variation of about 35%. While the pool is highly granular in terms of average borrower size, with an effective number of 3,600 and about 18,500 reference entities, the portfolio granularity has reduced due to amortization and the pairwise asset correlation has been increased to 8%.

Moody's has lowered it expected mean recovery to 65% from 70% due to lower than expected observed recoveries. Moody's recovery rate volatility assumption is 20%. In the base case, Moody's assumes the timing of defaults to occur at a constant quarterly rate over 6 years.

-- STRESS TESTS AND ASSUMPTIONS SENSITIVITIES

Extended periods of elevated default rates and low recoveries would adversely impact the transaction, as the credit enhancement provided by synthetic excess spread would be more heavily absorbed in such scenarios and losses might then be allocated to the notes. Moody's has tested the impact of increased default rates and alternative default timings, including scenarios with default spikes in early periods as well as constant default rates over two and four years to test their effect on the benefit of excess spread. While Moody's ratings reflects stresses on each of these dimensions, the rated notes would suffer losses consistent with lower ratings if default rates, recovery rates and the timing of default together turned out to be worse than historically observed for a sustained period.

--PREVIOUS RATING ACTIONS AND PRINCIPAL METHODOLOGIES

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The methodologies used in assigning and monitoring these ratings were "Moody's Approach to Rating CDOs of SMEs in Europe" published in February 2007, "Refining the ABS SME Approach: Moody's Probability of Default assumptions in the rating analysis of granular Small and Mid-sized Enterprise portfolios in EMEA" published in March 2009, and "Moody's Approach to Rating Granular SME Transactions in Europe, Middle East and Africa" published in June 2007. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Moody's used its excel-based cash flow model, Moody's ABSROM™, as part of its quantitative analysis of the transaction. Moody's ABSROM™ model enables users to model various features of a standard European ABS transaction including: (i) the specifics of the default distribution of the assets, their portfolio amortisation profile and recoveries; and (ii) triggers such as a switch from pro-rata to sequential in the loss allocation and amortization priority and credit enhancements such as subordination and synthetic excess spread on the liability side of the ABS structure. Moody's ABSROM™ User Guide is available on Moody's website and covers the model's functionality as well as providing a comprehensive index of the user inputs and outputs. MOODY'S CDOROMv2.8™ was used to estimate the standard deviation of the normal-inverse default distribution.

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, 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.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a 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.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

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.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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 www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

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Thorsten Klotz
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Moody's downgrades some ratings in Goodwood Gold Limited UK SME ABS
No Related Data.
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