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Rating Action:

Moody's downgrades to A2(sf) from Aaa(sf) Zephyros Finance S.r.l. class A2 notes, Italian leases ABS

05 Jul 2011

Aaa(sf) rating on class A1 notes confirmed

Paris, July 05, 2011 -- Moody's Investors Service today downgraded by five notches, to A2(sf) from Aaa(sf), the rating of the class A2 notes issued by Zephyros Finance S.r.l. At the same time, Moody's confirmed the Aaa(sf) rating of the class A1 notes.

A detailed list of today's rating actions can be found at the end of this press release.

RATINGS RATIONALE

Today's rating action involving the class A2 notes reflects Moody's concerns regarding both the transaction's performance and operational risk , given: (i) the worse-than-expected performance of the pool of assets; (ii) the increased exposure to residual value risk that is securitised in this pool; and (iii) insufficient operational risk mitigants present in the structure. Conversely, today's rating announcement involving the class A1 notes concluded the review initiated in March, which related to potential operational concerns regarding the call of the guarantee provided by the European Investment Fund (EIF; rated Aaa).

The ratings of the class A1 and A2 notes were put on review following the implementation on 2 March 2011 of Moody's rating guidance entitled "Global Structured Finance Operational Risk Guidelines: Moody's Approach to Analyzing Performance Disruption Risk". During the review process, Moody's considered the operational risks of the transaction and performed a detailed review of the performance of the transaction.

--REVISED PERFORMANCE ASSUMPTIONS

There has been a clear deterioration in asset performance over the last year. As in May 2011, loans in arrears by 60+ days amounted to approximately 8.85% of the current portfolio balance, while loans in arrears by 90+ days represented approximately 7.88% of the current portfolio balance. This is compared with 4.40% and 3.34%, respectively, at the same time a year ago.

Cumulative default levels are worse than expected at closing compared with the portfolio's pool factor and amortisation rate. As of May 2011, cumulative defaults reached 7.77% of the total securitised pool balance, compared with expected cumulative defaults at closing of 4.65% over the lifetime of the transaction.

To reflect this deterioration, Moody's increased the mean default assumption to 15% of the current portfolio outstanding balance, which translates into 14.4% of the total securitised pool balance. Moody's reviewed the volatility to 45% compared with 55% at closing, due to a reduction in uncertainty now that the revolving period has ended. Moody's adjusted the recovery rate to 37% (stochastic recoveries) based on observed recovery levels on the transaction defaulted contracts since closing. Additionally, Moody's considered the potential effect of originator insolvency on the recoveries in the transaction. If the originator became insolvent, Moody's would expect recoveries on defaulted lease contracts to be approximately 10%.

--RESIDUAL VALUE RISK

Today's action also takes into account the fact that during the amortisation period the residual value proportion of the pool increases and now stands at approximately 18% of the current pool balance. Unlike other Italian leases transactions, this transaction is exposed to residual value risk. Indeed the securitised portfolio includes the so-called "residual value option" (i.e., the instalment that the lessee has the option to pay at the end of the contract to acquire full ownership of the leased asset). It is not legally certain whether, upon originator insolvency, the special purpose vehicle (SPV) would be able to access the residual value proceeds, as these may in fact be classified as future receivables and would become trapped within the originator's bankruptcy estate upon originator insolvency. Moody's has taken such possible risk into account in its modelling of the deal, using a probabilistic approach that takes into account the lessor's credit quality and assumes a complete loss of the residual portion in the event of the lessor's insolvency.

--OPERATIONAL RISK

The servicer is Commercio e Finanza SpA (not rated), which is owned by Cassa di Risparmio di Ferrara (rated Baa3/P-3, on review for downgrade). Cassa di Risparmio di Ferrara is also the back-up servicer in the transaction.

The class A1 notes do benefit from an unconditional, irrevocable and first demand guarantee from the EIF. This guarantee would cover any shortfall of interests and principal payments on the A1 tranche. Moody's received clarification that in the case of a servicer default, there should not be any payment disruption under the class A1 interest payments. The cash manager (Bank of America) shall, in cooperation with the representative of the noteholders, calculate the shortfall to be called under the EIF guarantee, even if they do not receive detailed information from the servicer.

The class A2 tranche does not benefit from a guarantee from EIF. Given the back-up servicer is also the parent of the transaction´s servicer, Moody's also giving limited credit to the BUS arrangement because of the linkage between the transaction's servicer and Cassa di Risparmio di Ferrara.

Moody's views positively the relatively high level of liquidity present in the transaction, which represents approximately 5.4% of the current rated notes balance.

In summary, the revised A2(sf) rating on Class A2 notes is commensurate with both the revised default assumption including the increased risk related to the residual value portion and the operational risk concerns.

--TRANSACTION DETAILS

Zephyros is an Italian leasing ABS transaction that closed in 2008. The portfolio is located mainly in Southern Italy and comprises three pools of Italian financial leases for equipment, auto and real-estate leases. Due to the shorter amortisation profile of the equipment and auto portion, the securitised pool is now mainly exposed to real-estate contracts. The split between the three sub-pools (as of the last reporting date in May 2011) was 12.2% for equipment, 20.1% for auto and 67.7% for real estate.

PREVIOUS RATING ACTION & PRINCIPAL METHODOLOGIES

The principal methodology used in this rating was Moody's Approach to Rating Multi-Pool Financial Lease-Backed Transactions in Italy, published in June 2006. Please see the Credit Policy page on www.moodys.com for a copy of this methodology .

The "Historical Default Data Analysis for ABS Transactions in EMEA", published in November 2005 was also used in this rating. Other Factors used in this rating are described in The Lognormal Method Applied to ABS Analysis", published in July 2000.

Moody's used its excel based cash flow model, Moody's ABSROM™, as part of its quantitative analysis of the transactions. Moody's ABSROM™ model enables users to model various features of a standard European ABS and RMBS transactions including: (i) the specifics of the default distribution of the assets, their portfolio amortization profile, yield or recoveries; and (ii) the specific priority of payments, triggers, swaps and reserve funds on the liability side of the ABS and RMBS structures. 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.

LIST OF AFFECTED SECURITIES:

Issuer: Zephyros Finance S.r.l

....EUR135.95M A2 Note, Downgraded to A2 (sf); previously on Mar 2, 2011 Aaa (sf) Placed Under Review for Possible Downgrade

....EUR150M A1 Note, Confirmed at Aaa (sf); previously on Mar 2, 2011 Aaa (sf) Placed Under Review for Possible Downgrade

REGULATORY DISCLOSURES

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.

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 credit rating are the following: parties involved in the ratings , public information, 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.

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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 on our website www.moodys.com for further information.

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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Moody's downgrades to A2(sf) from Aaa(sf) Zephyros Finance S.r.l. class A2 notes, Italian leases ABS
No Related Data.
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