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Moody's updates on Arkle, Mound, Pendeford and Permanent UK RMBS Master Trusts

10 Jun 2011

London, 10 June 2011 -- Moody's Investors Service has been asked to assess the impact on the ratings of the notes issued out of the Arkle, Mound, Pendeford and Permanent master trusts following a proposal to restructure the trusts . Subject to noteholder approval, during [July 2011] Lloyds Banking Group (A1, on review for possible downgrade) intends to:

(i) for the four trusts listed above, replace part of the support provided by the reserve fund with a subordinated loan (the "Z Loan");

(ii) for Arkle and Permanent master trusts, reduce the margins payable on the intercompany loans from the yield reserve and increase the amounts payable from the trust. This would involve reducing the yield reserves, increasing the margins on the funding swaps and increasing the minimum trust yield during substitution;

(iii) make various updates to the documentation including updating the swap criteria and incorporating changes that ensure that the collection amounts held with one particular account bank does not exceed a 5% threshold; and

(iv) for the Pendeford and Mound trusts, include criteria that will enable the relevant Lloyds Banking Group entity to repurchase surplus loans from the trusts and give all noteholders in these trusts the option to sell notes to Lloyds TSB Bank plc (Aa3 on review for possible downgrade, P-1) on its expected maturity date subject to certain conditions.

In Moody's opinion this proposed restructuring of the trusts will not impact, in and of itself, the current ratings assigned to any of the notes issued out of these trusts.

In each trust, the reserve fund will be reduced to [2]% of the notes currently outstanding and a class Z loan will be issued such that the overall credit enhancement provided to the rated notes in the trusts remains the same as pre-restructuring. In Permanent master trust, this will impact both Funding 1 and Funding 2 companies. The interest on the newly issued Class Z loan will be paid via the revenue waterfall below the replenishment of the reserve fund as well as below all debits to the Principal Deficiency Ledger (PDL), including the PDL on Class Z. This will ensure that any additional revenue receipts allocated to funding as a result the new outstanding Class Z notes (and a subsequent increase in the funding share) will first be used to cover any unpaid PDL on the rated notes and then to replenish the reserve fund. The addition of new loans will be permitted if there is an unpaid PDL on the Class Z tranches and will now stop following a draw on the reserve fund, amongst other criteria.

For Arkle and Permanent master trusts, yield reserves previously established to pay excess margin on certain Class A notes will be reduced from [11.9]% to [1.9]% of the outstanding notes for Arkle master trust and from [5.9]% to [0.6]% of the outstanding notes for Permanent master trust. It is proposed that there will only be a general yield reserve for all notes rather than also having separate yield reserves for each issuance. Since the overall total margins payable on the notes will remain the same, to compensate for the decrease in the yield reserves, margins payable by the swap counterparty under the funding level swap will be increased. This will allow for the excess note margins (payable from the yield reserves) to be reduced and for the rest of the margins payable on the notes to be paid directly from the revenue receipts. As a result, the minimum margin specified in the substitution criteria will also be increased from 0.475% to [1.45]% in Arkle and from 0.5% to [1.5]% in Permanent. There will be no changes to the funding swaps or minimum trust yield during substitution in Pendeford and Mound master trusts.

The changes described above have been incorporated by Moody's into the cash flow modelling of each trust.

The documentation of each trust will be modified to include a threshold of 5% of the outstanding balance of the notes on the collections being kept in the same account bank. In case the amount of collections exceeds this figure, the amount in excess of 5% will be transferred into a different account bank, which also needs to satisfy the necessary rating requirements. The collections will then be transferred into the main account bank two days before each interest payment date to be distributed to the noteholders.

The criteria that will enable the relevant Lloyds Banking Group entity to repurchase surplus loans from the Pendeford and Mound trusts is in line with that governing the addition of new collateral and so relevant Moody's LTV / MPV test will apply in addition to other criteria such as the seller being rated at least P-1 and there being no reserve fund draw. The feature which enables notes to be sold to Lloyds TSB Bank plc on their expected maturity dates at par less PDL has now been introduced for all notes in Pendeford and Mound trusts. This feature is already present for some notes in other trusts of Lloyds Banking Group.

The principal methodology used in rating and monitoring the transactions is "Moody's Approach to Rating RMBS in Europe, Middle East, and Africa" published in October 2009. Other methodologies include "Moody's Updated Methodology for Rating UK RMBS" published in November 2007 and "Moody's RMBS Master Trust Cash Flow Analysis" published in April 2008", which can be found at in the Rating Methodologies sub-directory under the Research & Ratings tab.

Moody's ratings address the expected loss posed to investors by the legal final maturity of the notes. Moody's ratings address only the credit risks associated with the transaction. Other risks have not been addressed, but may have a significant effect on yield to investors.

Jonathan Livingstone
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Annabel Schaafsma
Senior Vice President
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's updates on Arkle, Mound, Pendeford and Permanent UK RMBS Master Trusts
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