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Rating Action:

Moody's places six German SME CDOs under review for downgrade

29 Apr 2010

Approximately EUR1.66 billion of debt securities affected

London, 29 April 2010 -- Moody's Investors Service has placed on review for possible downgrade the ratings of 25 Notes issued by six collateralized debt obligation (CDO) transactions backed by non-granular portfolios of German Small and Medium Enterprise loans (SME CDOs).

Today's rating actions are as follows:

Issuer: European Private Funding I Limited Partnership (Preps 2004-1)

EUR220M (Currently EUR180.8M) Senior Notes, Baa1 Placed Under Review for Possible Downgrade; previously on May 7, 2009 Downgraded to Baa1

Issuer: PREPS 2005-1 Limited Partnership

EUR175M (Currently EUR145.7M) A1, Aa1 Placed Under Review for Possible Downgrade; previously on Jun 17, 2009 Downgraded to Aa1

EUR60M (Currently EUR49.9M) A2, Aa1 Placed Under Review for Possible Downgrade; previously on Jun 17, 2009 Downgraded to Aa1

EUR47M B, Ba1 Placed Under Review for Possible Downgrade; previously on Jun 17, 2009 Downgraded to Ba1

Issuer: PREPS 2005-2 plc

EUR217M (Currently EUR189.2M) A1, A3 Placed Under Review for Possible Downgrade; previously on May 7, 2009 Downgraded to A3

EUR53M (Currently EUR46.2M) A2, A3 Placed Under Review for Possible Downgrade; previously on May 7, 2009 Downgraded to A3

EUR41.5M B1, Caa2 Placed Under Review for Possible Downgrade; previously on May 7, 2009 Downgraded to Caa2

EUR12.5M B2, Caa2 Placed Under Review for Possible Downgrade; previously on May 7, 2009 Downgraded to Caa2

Issuer: H.E.A.T Mezzanine S.A. - Compartment 3 Notes

EUR233M (Currently EUR217.8M) A, A2 Placed Under Review for Possible Downgrade; previously on Oct 15, 2009 Downgraded to A2

EUR31M B, B2 Placed Under Review for Possible Downgrade; previously on Oct 15, 2009 Downgraded to B2

EUR25.5M C, Caa3 Placed Under Review for Possible Downgrade; previously on Oct 15, 2009 Downgraded to Caa3

Issuer: PULS CDO 2006-1 PLC

EUR39.1M (Currently EUR31.4M) A1, A1 Placed Under Review for Possible Downgrade; previously on Jun 17, 2009 Downgraded to A1

EUR24M A2B, Baa1 Placed Under Review for Possible Downgrade; previously on Jun 17, 2009 Downgraded to Baa1

EUR26.5M B, Ba3 Placed Under Review for Possible Downgrade; previously on Jun 17, 2009 Downgraded to Ba3

EUR21.1M C1, Caa1 Placed Under Review for Possible Downgrade; previously on Jun 17, 2009 Downgraded to Caa1

EUR5.7M C2, Caa3 Placed Under Review for Possible Downgrade; previously on Jun 17, 2009 Downgraded to Caa3

EUR14.6M (Currently EUR15.2M) D, Ca Placed Under Review for Possible Downgrade; previously on Jun 17, 2009 Downgraded to Ca

EUR8.35M (Currently EUR9.2M) E1, Ca Placed Under Review for Possible Downgrade; previously on Jun 17, 2009 Downgraded to Ca

EUR2.85M (Currently EUR3.2M) E2, Ca Placed Under Review for Possible Downgrade; previously on Jun 17, 2009 Downgraded to Ca

EUR6M ComboP, Ca Placed Under Review for Possible Downgrade; previously on Jun 17, 2009 Downgraded to Ca

Issuer: Entry Funding No.1 plc

EUR358.5M (Currently EUR204.8M) A, Baa3 Placed Under Review for Possible Downgrade; previously on Aug 10, 2009 Downgraded to Baa3

EUR8M B, Caa1 Placed Under Review for Possible Downgrade; previously on Aug 10, 2009 Downgraded to Caa1

EUR8M C, Caa3 Placed Under Review for Possible Downgrade; previously on Aug 10, 2009 Downgraded to Caa3

EUR10M D, Ca Placed Under Review for Possible Downgrade; previously on Aug 10, 2009 Downgraded to Ca

EUR11M E, Ca Placed Under Review for Possible Downgrade; previously on Aug 10, 2009 Downgraded to Ca

Today's rating actions are the result of worse than anticipated credit deterioration affecting the underlying pools of these six German SME transactions. This is primarily reflected by higher default rates than envisaged when these deals were last monitored as further detailed below. To the extent available in a transaction, Moody's also considers as a key metric the increase in the Principal Deficiency Ledger (PDL). PDL is a measure representing the cumulative nominal amount of defaults in a transaction cured by the redemption of the senior note from excess spread proceeds. An increase in PDL highlights that the positive effect of excess spread diversion mechanisms designed to protect most senior tranches in the transaction is outbalanced by rate of defaults in a given portfolio. This therefore implies lower collateralization levels for all tranches. As most of these deals are highly concentrated (typically less than 60 obligors in each pool), ratings show an increased sensitivity to changes in collateralization levels.

Moody's expects to resolve its review in the coming weeks following further deal specific analysis.

European Private Funding I Limited Partnership (Preps 2004-1) has experienced further credit deterioration since last rating action on 7 May 2009, illustrated among others by the missed interest payment of a loan of EUR 10 million accounting for 4.7% of the outstanding portfolio pool.

Preps 2005-1 Limited Partnership has seen an increase in the PDL from zero to EUR 15.0 million (5.6% of the pool) between the February 2009 investor report and latest reporting date.

Preps 2005-2 plc has suffered further defaults causing the PDL to increase to EUR 52.0 million (18.4% of the pool) as given in the report dated March 2010 from EUR 32.9 million (10.5% of the pool) in the report used at last monitoring report dated March 2009. In addition, two credits accounting for EUR 24 million or 8.5% of the outstanding portfolio have recently missed interest payments suggesting further defaults are likely.

H.E.A.T Mezzanine S.A. - Compartment 3 Notes has seen an increase in the PDL to EUR 58.3 million (24.0% of the pool) as of the April 2010 report from EUR 27.3 million (10.4% of the pool) in the report dated October 2009.

PULS CDO 2006-1 PLC, which references some senior unsecured in addition to subordinated bonds, has seen an increase in its PDL to EUR 36.1 million (18.7% of the pool) in the January 2010 report from EUR 25.8 million (12.1% of the pool) as of the April 2009 report.

Entry Funding, which is exposed to a relatively more granular portfolio made of senior unsecured loans from 185 issuers, has experienced an increase in the PDL to EUR 31.1 million (14.99% of the pool) on March 2010 from EUR 20.8 million (8.2% of the pool) on June 2009 and an increase in delinquencies over the same period.

Today's watchlisting does not indicate an increased pessimism regarding the German SME sector as a whole but rather reflects worse than expected performance of the above listed transactions. Despite early signs of stabilization in the German SME loan market, Moody's outlook on German SMEs continues to be negative in H01 2010, as a result of persisting liquidity concerns for small and medium businesses in the context of a sluggish economic recovery in Germany. Moody's expects that the default rate for the SME sector in 2010 will be comparable to that of 2009.

Moody's initially analyzed and continues to monitor this transaction using primarily the methodology and its supplements for cash flow CLOs as described in Moody's Special Reports and press releases below:

--Moody's Approach to Rating Corporate Collateralized Synthetic Obligations (March 2009)

--Moody's Approach to Rating CDOs of SMEs in Europe (February 2007)

These reports can be found at www.moodys.com in the Research and Ratings directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating these issuances can also be found in the Ratings Methodologies subdirectory. 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.

London
Greg O''Reilly
Associate Analyst
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Paris
Florence Tadjeddine
VP - Senior Credit Officer
Structured Finance Group
Moody's France S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's places six German SME CDOs under review for downgrade
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