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APRIL 2011

European RMBS & ABS


PUBLISHER
Nitesh Shah Economist 44.20.7772.5603 Nitesh.Shah@moodys.com

ARTICLES
Standardisation of Disparate Spanish Investor Reporting Would Enhance Transaction Data Quality ABS & RMBS: The reporting standards from Spanish gestoras varies significantly in terms of the amount, quality, nature and frequency of information. By calculating certain performance measures, we are able to compare the performance of Spanish transactions. However, the quality and quantity of information will improve if a common reporting standard is adopted by Spanish gestoras. Weak Wage Growth in the UK Is Credit Positive for UK RMBS and UK Consumer ABS ABS & RMBS: Weak wage growth has helped contain the rise in unemployment in the UK and has therefore been positive for UK RMBS and UK consumer ABS.

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EDITOR
Neil Buckton Senior Editor 44.20.7772.8724 Neil.Buckton@moodys.com

CONTACT US
CreditInsight@moodys.com

Longer Bankruptcy Proceedings Are Credit Negative for Italian RMBS and ABS 8 ABS & RMBS: Bankruptcy proceedings are taking longer in Italy despite legislation in 2006-2007 aimed at increasing the efficiency of the process. Bankruptcy court delays have hurt the performance of the Ares Finance S.r.l transaction. If repayment is dependent upon recovery proceeds realised from bankruptcy filings, other transactions will be negatively affected by these delays. Stricter Dutch Mortgage Underwriting Is Credit Positive for Mortgage Lenders, RMBS and Covered Bonds RMBS & Covered Bonds: New underwriting criteria will require borrowers to build equity faster. The number of back-ended mortgage defaults will be reduced as the interests of the borrower and lender will be more closely aligned. 9

KEY LINKS
Performance: Dutch RMBS Indices EMEA Auto Loan ABS Indices EMEA Consumer Loan ABS Indices EMEA Covered Bonds EMEA SME ABS Indices Greek RMBS and ABS Indices Irish Prime RMBS Indices Italian Leasing ABS Indices Italian RMBS Indices Portuguese RMBS Indices Spanish RMBS Indices Spanish SME Indices UK Buy-to-Let RMBS Indices UK Credit Card ABS Indices UK Non-Conforming RMBS Indices UK Prime RMBS Methodologies: Auto loan ABS methodology Covered bonds methodology Credit card ABS methodology RMBS methodology SME methodology

Securitisation Provides Viable Funding Alternative for Mid-Sized UK Mortgage Lenders 11 RMBS: Skipton Building Society, which has traditionally been largely retail funded, has turned to securitisation for the first time. Intense competition for deposits, more limited wholesale funding options and the phasing out of government-supported funding schemes have forced mid-sized UK mortgage lenders to find alternative funding sources. The Outlook for Portuguese RMBS Collateral is Negative We expect both delinquencies and defaults for Portuguese RMBS to rise. The recession in Portugal will continue to lead to job losses. Falling housing prices will increase severity. Germany Backs Treatment of Certain Covered Bonds as Liquid Assets for Basel III Liquidity Purposes Covered Bonds: The treatment of covered bonds as a high quality asset for Basel III purposes could reduce refinancing risk for existing covered bond programmes. 13

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Legal Corner: Jury Still Out on Impact of Proposed EU Framework Powers on Structured Transactions 16 ABS & RMBS: European Commission (EC) proposals to give EU-based authorities wide-ranging powers to intervene in the operation of failing credit institutions will be credit neutral for structured finance transactions involving EU-based banks, provided that the final legislation incorporates appropriate safeguards and policy objectives.

SERVICERS-UPDATE ASK MOODY'S SUMMARY OF OUR INDICES AND ECONOMIC STAT DASHBOARD KEY RATING ACTIONS AND REVIEWS IN THE PIPELINE RMBS AND ABS BULLETIN BOARD EVENTS

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MOODYS CREDIT INSIGHT

APRIL 2011

ARTICLES
Ludovic Thebault Associate Analyst 49.69.70730.764 Ludovic.Thebault@moodys.com Ariel Weil Vice President -Senior Analyst 33.1.5330.1048 Ariel.Weil@moodys.com

Standardisation of Disparate Spanish Investor Reporting Would Enhance Transaction Data Quality
Upon examining the level and type of information provided by the seven management companies, or gestoras, for structured finance transactions, we conclude that: (i) the information provided by gestoras varies significantly in terms of its nature, amount and frequency; (ii) recalculating the information from the gestoras diverse reporting standards allows us to make comparisons; and (iii) the introduction of a common reporting standard would greatly improve the quality of information published by gestoras. The standardisation of reporting is even more important in light of the significant deterioration in performance that occurred during the global economic crisis. Information from gestoras varies widely in terms of amount, quality, nature and frequency. Overall, gestoras provide substantial amounts of information online. However, the information supplied is not standardised and thus significant differences exist among the investor reports produced by gestoras. 1 For instance, EdT, InterMoney, TdA and Gesticaixa provide detailed information on a monthly basis, but do not provide explicit trigger calculations (see Table 1). Conversely, AyT and Santander provide a number of trigger calculations but report quarterly or even semi-annually depending on the frequency of payment dates. Moreover, they provide only an adequate amount of details.
TABLE 1

Information from different gestoras is difficult to compare

Comparison of Information Provided by Gestoras


AYT EDT Yes Monthly Yes GAT Yes Monthly Yes Gesticaixa Yes Monthly Yes InterMoney Santander Yes Monthly Yes Yes Quarterly Yes TDA Yes Monthly No

Adequate means only basic performance information is provided in the investor reports, making extra information necessary for monitoring (i.e. pool cuts to be used to make stratification tables and extra lists of defaults to calculate cumulative defaults and recoveries); Satisfactory means an important amount of extra information is provided on a monthly basis; Above average means that an important amount of detailed information is provided on a monthly basis, minimizing the need to reprocess or request additional data.

General characteristics Reports available online Yes Reporting frequency Quarterly Historical reports Yes available Quality of information Waterfall details

Satisfactory Above Average Delinquency details Satisfactory Above Average Stratification tables Above Adequate quality Average Availability of key indicators Cumulative write offs Cumulative 90 days Trigger calculations Transaction accounts Overall opinion
b a

Adequate

Satisfactory

Satisfactory Above Average c Above Average Yes No No Yes Adequate


f

Above Average Above Average Above Average No No No Yes Satisfactory


d

Adequate Adequate Adequate

Satisfactory Satisfactory Above Average No No No


d

No No

Yes Yes No Yes

Yes Yes No Yes Above Average

No No

Partially Not relevant Adequate

Partially

Not relevant Yes Adequate Satisfactory

Above Average

a Understood as "the sum of the loans that became written off loans counting each loan only once and for its value at the time it became defaulted".

AHORRO Y TITULIZACION (AyT) http://www.ahorroytitulizacion.com/; EUROPEA DE TITULIZACIN, S.A., S.G.F.T. (EdT) http://www.edt-sg.com/; Gestin de Activos Titulizados, S.G.F.T., S.A. (GAT) http://www.gat-sgft.info/; GestiCaixa, S.G.F.T., S.A. (GC) http://empresa.lacaixa.es/gesticaixa/; INTERMONEY TITULIZACIN S.G.F.T. (IM) http://www.imtitulizacion.com/; Santander de Titulizacin, SGFT, S.A. (SANTANDER) http://www.santanderdetitulizacion.es; Titulizacin de Activos, SGFT, S.A. (TdA) http://www.tda-sgft.com; Audited accounts are made available on the CNMV website http://www.cnmv.es/Portal/consultas/busqueda.aspx?id=25

MOODYS CREDIT INSIGHT

APRIL 2011

b Understood as "the sum of the loans that became 90 days delinquent counting each loan only once and for its value at the time it became 90 days delinquent". c Stratification tables are not provided in the investor reports but can be made using the pool cuts. d Cumulative write offs can be calculated from the reporting. TdA and IM provide new defaults, which can be added over time. For AyT, new write offs can eventually be calculated and added over time. e Santander's cumulative default figure can actually decrease and is therefore not truly cumulative. f Information is not available online but provided to Moody's upon request. g Cumulative write off is reported, but cumulative figure may actually omit to include repossessed properties that would take place before being written off.

We calculate indicators that aid comparison across gestoras

Recalculating the data provided by gestoras allows us to make comparisons. In order to compare transactions for which the reporting differs, we use homogenous performance measures that can be calculated for all the transactions, such as the Loss Performance Indicator (LPI) ratio 2 or the 90-360 day delinquencies/current pool balance. When gestoras do not explicitly provide trigger values, we use the available data to calculate trigger values ourselves (made available in our performance overviews). When cumulative 90-day delinquencies 3 are unavailable, we calculate proxies, either by adding the 90-120 day delinquency buckets on a monthly basis (for InterMoney and TdA transactions) or by adding the 90-180 day delinquency buckets on a quarterly basis (for Santander and AyT transactions). While all the gestoras need to show the pool balance, they sometimes show a figure that may or may not include delinquencies or defaults. As the example below demonstrates (see Box 1), this discrepancy can make the calculation of a simple coverage ratio quite difficult. For our performance overviews, we show a pool balance that includes delinquent amounts but excludes defaulted (written-off) amounts. BOX 1: CALCULATING A COVERAGE RATIO TO CONFIRM THAT ASSETS MATCH LIABILITIES In a transaction with a reserve fund that is not fully depleted, we would expect to be able to make an asset-liability-test at every point in time, to check that assets/liabilities = 100%. This calculation is not always straightforward using the information made available by gestoras (see Table 2). For instance, the pool value provided by EdT includes some defaulted amounts. Conversely, Santander provides a figure net of defaults while AyT includes all outstanding defaults in its pool values. We note that none of the calculations shown in Table 2 match each other, thus showing the diversity encountered in the reporting standards (although the result is in every case a 100% ratio). In our performance overviews, the pool balance includes delinquent amounts but excludes defaulted amounts.

TABLE 2

Coverage Ratio Calculation Using Reported Information


Transation Date Pool (A) Account (B) Out Def.(C) RF (D) Arrears (E) Notes (G) Calculation

AyT EdT GAT Gesticaixa Santander

AyT FTPYME I BBVA EMPRESAS 2 GAT FTGENCAT 2005 FONCAIXA FTGENCAT 5 SANTANDER EMPRESAS 2

Jan-11 Dec-10 Jan-11 Jan-11 Feb-11

94.4 1640.1 116.0 669.18 559.2

507.36+33.51 18.84 30.737 -

3.428 3.57+2.75+14+3.61 -

456.788 15.87 20.4 -

12.665 0.617 -

90.9 (A-C)/G 1714.4 (A+E-C+B-D)/G 117.9 (A+B-D)G 704.67-26.5 (A+E+B-D)/G 559.18* A/G

Figures are expressed in EUR millions, and shown as they appear in the investor reports *As sum of all notes (i.e. 324.28 + 84.1 + 62.3 + 59.5 + 29 + 53.7)

The LPI ratio, which uses figures available for all transactions, was introduced to limit the reliance on cumulative 90day delinquency figures. Our Spanish SME Indices lists the LPIs in Appendix 2 as well as Related Research on LPIs. http://www.moodys.com/viewresearchdoc.aspx?lang=en&cy=global&docid=PBS_SF240253 Used as a basis for our default assumption. Having this figure (reported under cumulative credit events on our ABS SME Performance Overviews) allows a direct comparison with our expectations.

MOODYS CREDIT INSIGHT

APRIL 2011

We believe that a common reporting standard among gestoras would greatly improve the amount and quality of data. Ultimately, we believe that a set of common reporting standards agreed upon by all gestoras and the publication of detailed transaction trigger calculations would significantly improve the quality and amount of information provided by the gestoras.
Standardisation of reporting standards will greatly improve the amount and quality of data

The performance of Spanish transactions severely deteriorated during the global economic crisis. Although the majority of gestoras responded by improving the quality and amount of information published, 4 the sheer scale of defaulted loans in most transactions requires even more detailed information from the gestoras. Ideally, all gestoras should report lists of incoming defaults as well as the corresponding cumulative figure. In the case of dacion in pago, 5 gestoras should include repossessed properties among the defaulted loans and provide detailed information regarding these loans. We will engage in a discussion with gestoras and update the Comparison of Information Provided by Gestoras table as necessary.

Nitesh Shah Economist 44.20.7772.5603 Nitesh.Shah@moodys.com

Weak Wage Growth in the UK Is Credit Positive for UK RMBS and UK Consumer ABS
Wage growth has failed to keep up with general price inflation in the UK for a number of years. Real household disposable incomes have fallen as a result. While on an individual household level it is clear that a fall in household income is credit negative, at a system level, weak wage growth has helped contain the rise in unemployment in the UK and has therefore been positive for UK RMBS and credit card ABS. Real wages are falling. Real wages, that is nominal wages adjusted for the rise in the cost of goods and services, 6 have been falling since the start of the recession in 2008 and have continued to fall during the recovery that started in 2009 (see Chart 1).
CHART 1

UK Real and Nominal Wages (Indexed to 100 in 2000)


Real Wages (Left Axis) Nominal Wages (Right Axis) 130 125 120 115 110 105 160 150

140 130 120 110

100

100

Source: Office for National Statistics, Moodys Investors Service

4 5 6

Examples of extra information provided during the course of the crisis include: EdT introducing cumulative write-off reports; Santander including triggers; Gesticaixa now showing cumulative 90-day delinquencies. Dacion in pago is the process whereby a bank can cancel a loan in exchange for the collateral of the loan. This allows the bank to repossess the property quicker, but limits possible recoveries to the amount of the repossessed property. Real wage= Nominal wage/ 1 + % increase in prices since base year.

Jan 2000 Apr 2000 Jul 2000 Oct 2000 Jan 2001 Apr 2001 Jul 2001 Oct 2001 Jan 2002 Apr 2002 Jul 2002 Oct 2002 Jan 2003 Apr 2003 Jul 2003 Oct 2003 Jan 2004 Apr 2004 Jul 2004 Oct 2004 Jan 2005 Apr 2005 Jul 2005 Oct 2005 Jan 2006 Apr 2006 Jul 2006 Oct 2006 Jan 2007 Apr 2007 Jul 2007 Oct 2007 Jan 2008 Apr 2008 Jul 2008 Oct 2008 Jan 2009 Apr 2009 Jul 2009 Oct 2009 Jan 2010 Apr 2010 Jul 2010 Oct 2010 Jan 2011

MOODYS CREDIT INSIGHT

APRIL 2011

Nominal Wages (indexed to 100 in 2000)

Real Wage (Indexed to 100 in 2000)

Unemployment increased less in the 2008 recession than in the 1990 recession relative to the size of the contraction in GDP

The fall in real wages has helped contain the rise in unemployment. The impact of the latest recession on unemployment appears to have been considerably lower. The recession in 2008 was much deeper than in 1990, with the contraction in GDP in 2008 being 6.4% versus a contraction in GDP of only 2.5% in 1990. However, from Q1 2008 to Q4 2010, unemployment rose by 54% while unemployment rose by 57% between Q3 1990 to Q4 1993, a much larger increase relative to the contraction. A key driver behind the relatively better unemployment trend in the 2008 recession was the fact that real wages fell that year. This drop enabled employers to maintain higher levels of employment than they would have been able to had they increased wages in line with inflation. 7 Real wages fell by 2.1% during the 2008 recession while real wages rose by 0.8% in the 1990 recession (see Table 1).
TABLE 1

Real wages fell by 2.1% in 2008, helping to contain the rise in unemployment

Contrast of 1990 Recession and 2008 Recession


Recession GDP Contraction Number of Quarters of GDP Contraction Rise in Number of People Unemployed Number of Quarters of Unemployment Increase Real Wage Growth Over recession

19901991 20082009

2.5% 6.4%

5 (Q3 1990 to Q3 1991) 6 (Q2 2008 to Q3 2009)

57% 54%

11 (Q3 1990 to Q1 1993) 13 (Q1 2008 to Q4 2010)

0.8% -2.1%

Source: Office for National Statistics, Moodys Investors Service

A borrower losing their job has a more harmful impact on household income than a borrower facing a decrease in real wages

Higher unemployment levels are more credit negative than a fall in real wages. When a borrower loses their job, they lose a primary source of household income. Conversely, a small decrease in real wages has a harmful yet much smaller impact on household income. Therefore, a weak wage growth scenario is more favourable than a job loss scenario in terms of enabling borrowers to continue servicing debt. The low interest rate environment relies on weak wage growth. Weak wage growth allows many borrowers to continue to enjoy a lower interest rate environment. Many borrowers remain current on their loan obligations because of the low interest rate environment in the UK. 8 However, interest rates are likely to increase faster if there are signs of higher wage demands. 9 A rise in wage demands will create domestically generated inflation. The central bank can reduce the inflationary pressure from higher wage demands by increasing interest rates.

In 2010, real disposable household incomes fell for the first time since 1982

Disposable income has fallen in the UK as a result of weak wage growth. In 2010, real disposable household income fell to 870 billion (approximately 14,071 per capita) from 876 billion (approximately 14,182 per capita) in 2009 (see Chart 2). This fall was the first decline in real household disposable income since 1982. The fall in real wages (approximately 73% of household income comes from wages and salaries) drove the majority of this drop in disposable income.

8 9

There is a wide body of research linking wage moderation to higher employment levels. For example, see IMF Working Paper Wage Moderation in France, by Marcello Estevo and Nigar Nargis, November 2001 or VoxEU Article The roots of the German miracle, by Hermann Gartner and Christian Merkl, March 2011. See Low Interest Rates Support UK Housing Market, Weekly Credit Outlook, 17 August 2009. Although inflation rates have been markedly higher than the central banks target rate in the UK, the central bank has not increased interest rates yet. The main source of inflation is oil and commodity price increases. The central bank has very little ability to control prices of oil and commodities by changing interest rates (and that is why the central bank has not acted yet). A rise in wage demands will create domestically generated inflation. The central bank can reduce the inflationary pressure from higher wage demands by increasing interest rates.

MOODYS CREDIT INSIGHT

APRIL 2011

CHART 2

UK Disposable Household Incomes


Real Disposable Income 1,200,000 1,000,000 800,000 Nominal Disposable Income

Million

600,000 400,000 200,000 0

2000

2007

1988

2008

2004

2006

Source: Office for National Statistics, Moodys Investors Service

The weaker position of households will translate into weaker borrower performance. Table 2 illustrates the squeeze on household incomes from the rise in price of key expenditures. Nominal disposable income grew only 3.5% between 2009 and 2010. 10 However, the price of key household expenditures, including clothing, transportation and fuel increased considerably more than disposable income over the same period. This has resulted in weak high street spending 11 and a lower level of household saving. 12
.

TABLE 2

Example of Household Income and Expenditures in 2009 and 2010


( per week) 2009* Inflation ** 2010 ***

Household disposable income (nominal) Expenditure on: Transport Recreation and culture Housing, fuel and power Food and non-alcoholic drinks Restaurants and hotels Miscellaneous goods and services Household goods and services Clothing and footwear Communication Alcoholic drinks, tobacco and narcotics Education Health Other expenditure items Total expenditure Income less expenditure (nominal)

558.00

577.34

58.40 57.90 57.30 52.20 38.40 35.00 27.90 20.90 11.70 11.20 7.00 5.30 71.80 455.00 103.00

6.3% 0.9% 7.8% 5.0% 3.6% -1.7% 3.9% 10.4% 3.5% 5.8% 5.2% 0.9% 4.5%

62.09 58.40 61.79 54.81 39.79 34.40 28.99 23.07 12.11 11.85 7.37 5.35 75.06 475.07 102.27

* 2009 figures are from ONS Family Spending: A Report on the 2009 Living Costs and Food Survey ** Inflation calculated using implied deflators from household final consumption expenditures *** 2010 expenditure figures are calculated assuming households consumed the same amount of goods and services as they did in 2009 Source: Office for National Statistics, Moodys Investors Service

10 11 12

Our estimate is based on the reported aggregate nominal household disposable income of 942 billion in 2009 and 975 billion in 2010. Retail sales in volume terms grew only 0.4% in 2010, compared to 1.1% in 2009 and an average annual growth rate from 2007 to 2009 of 2.2% Household savings as percentage of disposable income fell to 5.6% in 2010 from 6.0% in 2009.

MOODYS CREDIT INSIGHT

APRIL 2011

2009

2003

2005

2002

2010

1990

1998

1994

1996

1989

1999

1993

1995

1992

2001

1987

1997

1991

Weighed against higher levels of unemployment the loss of household income is preferable in terms of UK RMBS and UK consumer ABS performance

This trend of decreasing disposable incomes is credit negative for securitised transactions. Falling disposable incomes are likely to push some delinquent borrowers into default. However, weighed against higher levels of unemployment, the loss in household income is preferable in terms of UK RMBS and consumer ABS performance. Prime RMBS pools show that 90+ day delinquencies are running at 1.9% of closing balance in January 2011, the same as they were in January 2010. Additional pressure will come from further decreases in disposable incomes because of tax rises and interest rate increases in 2011, as well as muted nominal wage growth.

Valentina Varola Vice President - Senior Analyst 39.02.9148.1122 Valentina.Varola@moodys.com Anne Sophie Spirito Assistant Vice President - Analyst 33.1.5330.2180 Anne-Sophie.Spirito@moodys.com

Longer Bankruptcy Proceedings Are Credit Negative for Italian RMBS and ABS
Italian bankruptcy law reforms implemented in 2006-2007 have been unsuccessful in speeding up bankruptcy procedures, as originally envisaged. Instead, bankruptcy proceedings in Italy are now on average lengthier than before the introduction of the reforms. This is credit negative for securitised transactions where repayment is also dependent on recoveries realised as a result of bankruptcy proceedings. Moreover, the longer process has been one of the causes of a near default in the Ares Finance S.r.l, an Italian non-performing loans transaction. The reforms of 2006-2007 have not had the desired effect. Legislators reforms of the Italian bankruptcy law, which were aimed at increasing efficiency in the liquidation process of bankrupted firms, have failed. The latest report by Cerved Group 13 states that, bankruptcy procedures closed in 2010 took on average 8.6 years to complete, compared with 6 years in 2001. In fact, 15% of bankruptcies took more than 15 years to solve, with 4.3% taking even longer than that. 14 Italian Bankruptcy Proceedings Duration (Years)
10 9 8 7 6

Years

5 4 3 2 1 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Cerved Group "Osservatorio trimestrale sulla crisi di impresa", March 2011

The economic recession created bankruptcy filing backlogs in the court system. We believe that part of the reason for the rise in bankruptcy proceeding times is that the number of cases entering the court system climbed during the economic recession, creating a backlog. On average, the

13 14

Osservatorio trimestrale sulla crisi di impresa, published in March 2011. Only 12% of the bankruptcy procedures closed in 2010 took less than two years to complete. 13% took between three and four years, and 17% between five and six years.

MOODYS CREDIT INSIGHT

APRIL 2011

number of bankruptcy filings and proceedings increased by more than 20% in 2009 compared with 2008, according to Ministry of Justice data. 15 Bankruptcy court delays hurt the performance of the Ares Finance S.r.l transaction. The issuer had insufficient funds to fully repay the class E and F notes of the Ares Finance S.r.l transaction at their initial legal final maturity date on 25 March 2011. Actual cumulative collections were lower than expected. 16 The original maturity date did not allow for the length of time for needed enforcements and bankruptcy proceedings in the portfolio, as opposed to a shortfall in the recovery values of each position. Subsequently, the issuer restructured the deal with the legal maturity extended to avoid a default on the notes. 17 We withdrew the rating of the notes following the restructuring. The recovery proceeds from individual proceedings when they materialised were better than expected. Since the transactions closing, the profitability ratio of the portfolio 18 has been consistently higher than business forecasts. The longer maturity will allow for future collections to benefit the notes. The performance of Ares Finance 2 SA also suffers from the lengthening of bankruptcy proceeding times. However, its current rating fully reflects this risk. Separately, Sagrantino Italy S.r.l., while having a long enough maturity to deal with long bankruptcy proceeding times, has seen its recovery proceeds fall short of initial expectations . We also ran several sensitivity tests to confirm rating robustness in view of the different recovery times for Italian SME transactions. The longer recovery process is credit negative for transactions that rely on recovery proceedings. 19 Although the recovery process has always been slow in Italy, the process is now taking even longer. The impact will be credit negative for transactions where repayment is also dependent on recoveries realised as a result of bankruptcy proceedings. Transactions potentially affected include SME asset-backed securities (ABS), non-performing loan (NPL) ABS and residential mortgage-backed securities (RMBS).

Ivo Raschl Vice President Senior Analyst 44.20.7772.5494 Ivo.Raschl@moodys.com Jane Soldera Vice President Senior Credit Officer 44.20.7772.5318 Jane.Soldera@moodys.com Olimpia Da Silva Associate Analyst 49.69.70730.787 Olimpia.DaSilva@moodys.com Stephane Herndl Analyst 33.1.5330.1071 Stephane.Herndl@moodys.com

Stricter Dutch Mortgage Underwriting Is Credit Positive for Mortgage Lenders, RMBS and Covered Bonds 20
On 21 March 2011, the Dutch Finance Ministry announced an agreement with the Dutch Authority for Financial Markets (AFM) and Dutch mortgage lenders to tighten mortgage lending criteria. The new policy is credit positive for Dutch mortgage lenders and securities backed by Dutch mortgage loans (RMBS and covered bonds) because it will curb the use of non-amortising mortgage products.

15

16 17

18

19

20

Ministry of Justice data updated in February 2011 and covering the 2006 to 2009 years - record the number of bankruptcy filings (istanze di fallimento) and procedures (procedimenti di fallimento) at the level of the 26 district tribunals. On average, the number of bankruptcy filings increased by 21% in 2009 compared with 2008. Only four tribunals (in the Islands) have recorded a decrease. On the other hand, all 26 tribunals have recorded an increase in the number of bankruptcy proceedings in 2009, as opposed to 2008. The average growth ratio has been 28.6%. Unfortunately the data do not cover 2010. On that date, Class F had not started being repaid and Class E had been repaid for 90.6% of its initial balance. Please refer to Moodys press release dated 31/03/2011 Moodys withdraws the rating of all outstanding classes of notes issued by Ares Finance S.r.l. Profitability ratio: average of the actual collections on each closed position divided by the initially projected collections on each position Leases transactions are less affected as the asset ownership remains with the lender and repossession is both quicker and more straightforward Extracted from "Moody's Weekly Credit Outlook", dated March 28, 2011

MOODYS CREDIT INSIGHT

APRIL 2011

New policy requires borrowers to build equity faster. Under the new policy, a borrower can borrow up to 50% of a propertys value in an interest-only loan part 21 and must borrow the remainder via an amortising loan part. 22 Assuming no home price appreciation, the new policy will lead borrowers to begin building equity in their homes in about 10 years, rather than in 1520 years 23 under current underwriting practise. The exhibit below shows loan amortisation and homeowners equity under current practice and under the new policy. Loan to Value and Homeowners Equity
Original Market Value of Property LTV Under Current Practise Homeowner's Equity Under Current Practise 120% 100% LTV Under New Policy Homeowner's Equity Under New Policy

Loan-to-Value

80% 60% 40% 20% 0% 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Years

Source: Moodys

Back-ended mortgage defaults will decrease because borrowers will build equity in their homes earlier and reduce balloon payments at loan maturity

Borrowers willingness to meet mortgage payments will rise as their equity increases. This positively impacts mortgage lenders, new RMBS transactions and covered bond transactions, since non-amortising mortgage products drive mortgage defaults and directly affect loss given default. Borrowers willingness to pay mortgage instalments will rise with the increasing equity in the mortgage and back-ended mortgage defaults will decrease because of reduced balloon payments at maturity. Loan-to-value (LTV) limits of 110% will be credit neutral. A less significant aspect of the announced agreement is that it limits loans to 110% LTV. This does not differ substantially from the current limit used by originators. Dutch mortgage lenders underwrite loans based on foreclosure value, which is the property value based on a distressed sale estimated by a real estate appraiser. The advance rate for mortgage loans is limited to a loan-to-foreclosure-value (LTFV) of 125%. The rule of thumb is that the foreclosure value is 10%-15% lower than the market value or purchase price of the property, which translates the LTFV limit of 125% to an LTV of 108%113% based on market value. The new policy will increase monthly mortgage payments but does not affect affordability. The implementation of the new policy, which we expect to be in August, will increase monthly mortgage payments and reduce disposable income, but should not affect borrowers ability to pay since loans are underwritten based on a standard affordability calculation that assumes interest and full repayment over a 30-year period. Even under the new policy, actual mortgage payments are less than the payments assumed in the affordability test. The new policy is very similar to the underwriting criteria for loans guaranteed under the national mortgage guarantee scheme (Nationale Hypotheek Garantie, or NHG). In 2010, 50% of all originated mortgages were NHG-guaranteed and therefore have been underwritten using the NHG-criteria.

LTV limits of 110% will not materially change current lending practices

Mortgage affordability will not deteriorate. Current underwriting standards already assume higher payments in the affordability test than the actual payments that will result from the change in policy

21

22 23

Mortgage loans in the Netherlands can consist of multiple loan parts. Each loan part can have different characteristics in terms of amortisation type and interest reset period. A typical loan consists of an interest-only loan part and an amortising loan part (either direct amortisation or through a separate repayment vehicle). Either through direct amortisation of the loan part or through a separate tax friendly repayment vehicle, such as a savings account or insurance policy. Based on average originators underwriting policy, whereby only the part of the loan up to 90%-100% LTFV can be interest-only.

10

MOODYS CREDIT INSIGHT

APRIL 2011

Tighter mortgage lending criteria could dampen demand for housing and cool the market

The proposal will have only a moderate impact on house prices. Because Dutch house prices proved relatively resilient during the recent financial crisis, we expect that the proposal will have only a moderate effect on house prices. However, tighter mortgage lending criteria could dampen demand for housing and cool the market. Lower prepayment rates will affect RMBS transactions and increase refinancing requirements for sponsors. We expect prepayment rates to fall because borrowers now have more incentive to keep mortgage loans based on the old policy, because of the lower amortisation requirement, than to refinance at lower interest rates. Lower prepayment rates impact RMBS transactions because credit enhancement under senior notes builds up more slowly. Lower prepayments will also increase the refinance requirement for sponsors of outstanding RMBS transactions if they choose to exercise call options on the notes. For covered bond programmes, lower prepayment rates are negative for refinancing risk (however we already model refinancing risk based on conservative prepayment assumptions). Potential benefits exist for mortgage lenders and bank liquidity. A move from interest-only loans towards loan portions with repayment vehicles, such as life insurance policies, positively impacts mortgage lenders that cross-sell mortgage loans and insurance policies. In addition, an increase in pure savings accounts as amortisation vehicles linked to mortgage loans may also be positive in view of bank liquidity under the forthcoming implementation of Basel III. The announcement of the new policy concludes a series of discussions between the AFM and Dutch mortgage lenders over the past few months. 24 The policy still needs to be passed in parliament, but we do not expect any significant resistance.

Jonathan Livingstone Vice President Senior Analyst 44.20.7772.5520 Jonathan.Livingstone@moodys.com

Securitisation Provides Viable Funding Alternative for MidSized UK Mortgage Lenders


Intense competition for deposits, more limited wholesale funding options and the phasing out of government-supported funding schemes have forced mid-sized UK mortgage lenders, such as Skipton Building Society (Baa1, Negative) (Skipton), to find alternative funding sources. Skipton, which has traditionally been largely retail funded, has turned to securitisation for the first time. Although not previously used as a funding source, securitisation is proving to be a viable funding option for financial institutions such as Skipton, as demonstrated by the strength in demand for the lenders first securitisation, the Darrowby No. 1 plc transaction. On the 31 March 2011, Skipton closed Darrowby No.1 plc, its first securitisation backed by residential mortgages. Skipton sold 350 million of notes to third-party investors and entered a securities lending transaction (repo) using 500 million of notes with JP Morgan. While the terms of the repo are confidential, it would be usual for such a repo to incorporate a haircut on the value of the notes and to provide funding to the step-up date of the notes (March 2016) as long as performance triggers are not breached. Securitisation can help in meeting the funding needs for Skipton and other similar-sized lenders. The Darrowby deal achieved spreads above the London Interbank Offered Rate (LIBOR) indices (125 bps for the 1.08-year A1 notes and 150 bps for the 4.24-year A2 notes) that are in line with other recent RMBS deals, which have typically priced at around these levels. Equally important, the Darrowby spreads compare favourably to the cost of Skiptons other funding sources. This

24

See also Tightening Mortgage-Lending Criteria to Affect Dutch RMBS Positively, Credit Insight 16 February 2011.

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comparison shows securitisation is a viable funding alternative to retail deposits for mid-sized UK mortgage lenders.
The Darrowby transaction illustrates that securitisation is a viable funding alternative to retail deposits for midsized UK mortgage lenders

The collateral backing Darrowby No.1 plc is fairly typical compared to other UK Prime RMBS. Skipton originated the underlying mortgages backing the transaction for UK prime borrowers. The transaction has more than three years seasoning and an average loan-to-value (LTV) ratio of 61.2%. Self-employed borrowers and interest-only mortgages made up 13.4% and 33.8% of the pool, respectively. Wholesale funding is playing a reduced role in Skiptons funding mix. At the end of 2010, Skiptons total wholesale funding of 3.0 billion (including bank deposits) was 762 million lower than at the end of 2009 (see Table 1). This reduction was in large part due to the fall in short-term issued debt to 96.7 million as of December 2010 from 605.1 million as of December 2009. Additionally, the market for long-term unsecured funding remains out of reach for mid-sized UK mortgage lenders, with long-term debt dropping by 51 million in 2010. Skiptons long-term debt (see the table below) of 749.5 million includes the lenders government-guaranteed transaction, which is due to be repaid in April 2012.
TABLE 1

Skiptons wholesale funding fell in 2010 compared to 2009 because of the fall in short-term issued debt by 508.4 million

Skipton Wholesale Funding


December 2010 Million % December 2009 Million %

Amounts owed to credit institutions Amounts owed to other customers Debt securities in issue: In not more than one year In more than one year Subordinated liabilities Total wholesale funding Customer deposits

853.6 1,088.8 96.7 749.5 214.2 3,002.8 9,388.5 12,391.3

6.9% 8.8% 0.8% 6.0% 1.7% 24.2% 75.8% 100.0%

942.2 1,203.9 605.1 800.5 213.0 3,764.7 10,470.2 14,234.9

6.6% 8.5% 4.3% 5.6% 1.5% 26.4% 73.6% 100.0%

The Darrowby transaction has helped Skipton meet its funding needs for 2011

Skipton has now met its funding needs for 2011. Skiptons long-term funding requirement for 2011 was around 375 million. Following the recent securitisation transaction, the group has now raised significantly more than this, despite the general difficulties in the banking funding markets because of market concerns over the financial stability of smaller financial institutions. However, in line with other UK lenders, downside risks remain surrounding flat or negative lending growth, regulatory pressures, asset qualities and the lack of economies of scale. 25 Additionally, we are beginning a reassessment of the systemic support assumptions that we currently incorporate into our senior debt ratings for UK financial institutions. 26 Maturities of central bank-related facilities mean alternative sources of funding will be required. Significantly, Skipton will face the maturity of government-related funding over the next 18 months. As at the end of 2009, Skipton had issued UK government-guaranteed debt totalling 650 million, which will be maturing up until May 2012. In line with other lenders, Skipton has not disclosed whether it has utilised the Bank of Englands Special Liquidity Scheme, which expires in 2012 and provides three-year funding to banks by allowing them to place certain high quality assets as collateral for T-Bills.

As government- and central bankrelated facilities mature, alternative sources of funding will be required

25 26

Please see Outlook For UK Mortgage Lenders - Key Credit Themes In 2010 and Beyond, July 2010 Please see Moodys to reassess systemic support for UK financial institutions, April 2011

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Abdelkarim Badis Business Administrator 44.20.7772.5405 Abdelkarim.Badis@moodys.com

The Outlook for Portuguese RMBS Collateral is Negative


Over the coming year, we expect a rise in both delinquencies and defaults for Portuguese residential mortgage-backed security (RMBS) transactions, despite a stable performance in the 12months through January 2011. We believe this deterioration in performance will be driven mainly by domestic economic weakness. As such, our outlook for Portuguese RMBS collateral remains negative. The overall performance of Portuguese RMBS was stable in 2010. In the 12-month period leading up to January 2011, 60+ day delinquency rates for Portuguese RMBS dropped steadily to 1.4% from 1.6% of the current pool balance. Outstanding defaults (360+ days overdue, up to write-off) increased only from 1.5% in January 2010 to 1.6% in January 2011 with a July peak of 1.8%. Weighted average cumulative losses, defined as the difference between the cumulative written-off amounts and cumulative recoveries when the realised losses are not available, increased to 0.8% of the original pool balance in January 2011 from 0.6% in January 2010. The majority of Portuguese RMBS transactions also benefitted from a provisioning mechanism, under which excess spread is captured to provide for future losses on highly delinquent loans before the losses are actually realised.
CHART 1

Portuguese RMBS 60+ Days Delinquency - Trend by Originator


Banco BPI Barclays BST Montepio Index transactions before 31 Dec 2007 6.00 BANIF BES Millennium BCP Index transactions after 31 Dec 2007 Index

Delinquency 60+ [% of CB]

4.00 2.00 -

Source: Moody's Investors Service, Moody's Performance Data Service, periodic investor/servicer reports CHART 2

Portuguese RMBS Outstanding Defaults - Trend by Originator


Banco BPI Barclays BST Montepio Index transactions after 31 Dec 2007 Index 6.00 4.00 2.00 BANIF BES Millennium BCP Other Index transactions before 31 Dec 2007

Source: Moody's Investors Service, Moody's Performance Data Service, periodic investor/servicer reports

Three transactions have performed worse than other Portuguese RMBS. Three transactions consistently recorded 60+ day delinquency trends that remained at levels in excess of 2% of the current balance. These transactions are: Atlantes Mortgages No.1 Plc originated by BANIFBanco Internacional do Funchal, S.A.; Lusitano Mortgages No. 6 Limited originated by Banco

13

Default Out. -> Default - Recoveries (Cum) [% of CB]

MOODYS CREDIT INSIGHT

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Espirito Santo, S.A.; and Navigator Mortgage Finance No. 1 plc originated by Banco Popular Portugal. In addition, five transactions 27 have currently drawn on their reserve funds.
We expect delinquencies and losses to increase

A weakening domestic economy will hurt borrowers ability to service debt and push up delinquencies. We expect that delinquencies will climb as more borrowers lose their jobs. In 2011, we expect the Portuguese economy to experience a double-dip recession with a 0.6% contraction in GDP. This will follow a 1.3% expansion in 2010 and 2.5% contraction in 2009. We anticipate that unemployment rates will rise to 11.0% in 2011 from 10.8% in 2010. Tax increases will further reduce household disposable income and accentuate borrowers difficulties in terms of servicing their debts. House prices fell 3.0% between April 2010 and January 2011, after having risen 3.6% between March 2009 and April 2010. This drop in house prices will contribute to increasing losses on foreclosed properties. All Portuguese transactions are on review for possible downgrade. In light of the increased country and banking sector risk, we recently downgraded the ratings of 18 tranches of RMBS transactions to Aa2(sf) and 20 tranches to A1(sf). Ratings on all Portuguese RMBS deals remain on review for further possible downgrade pending: (i) the conclusion of the rating review of Portuguese government and bank ratings; and (ii) our detailed review of the collateral and structural features of each transactions. Two recent sets of downgrades, in March 2011 (from A1 to A3) and April 2011 (from A3 to Baa1), of the Government of Portugals sovereign rating and a number of Portuguese financial institutions highlight the elevated levels of sovereign and banking sector risk in Portugal. The volume of outstanding Portuguese RMBS transactions climbed year on year. As of January 2011, the total outstanding pool balance in the Portuguese RMBS market was 23.59 billion, compared with 23.35 billion for the same period in the previous year. This constitutes a year-onyear increase of 1.0%. In November 2010, we rated Nostrum Mortgages No.2, with an original note balance of 5.3 billion, which contributed to the rise in outstanding pool balance over the past year.
CHART 3

Portuguese RMBS Outstanding Portfolio Balance by Originator


Banco BPI 30,000M 25,000M BANIF Barclays BES BST Millennium BCP Montepio Other

O/S Pool Balance

20,000M 15,000M 10,000M 5,000M -

Source: Moody's Investors Service, Moody's Performance Data Service, periodic investor/servicer reports

For more details on the data please refer to the recent Portuguese RMBS Indices published in March 2011.

27

Bocage Mortgages No. 1 Limited, Lusitano Mortgages No. 4 plc, Lusitano Mortgages No. 5 plc, Lusitano Mortgages No. 6 Limited, Navigator Mortgage Finance No. 1 plc

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Dr. Volker Gulde Vice President Senior Analyst 44.20.7772.5578 Volker.Gulde@moodys.com Dr. Martin Rast Vice President Senior Analyst 44.20.7772.8676 Martin.Rast@moodys.com

Germany Backs Treatment of Certain Covered Bonds as Liquid Assets for Basel III Liquidity Purposes 28
On 21 March 2011, a representative of the German Finance Ministry stated in a published article 29 that covered bonds meeting certain criteria should be treated as high-quality liquid assets for the purposes of the liquidity coverage ratio (LCR) under Basel III rules. The article supports an initiative by the Association of German Pfandbriefbanks and the Association of Danish Mortgage Banks, which is credit positive for such covered bonds because, if implemented, it would reduce investor losses arising because of refinancing risks. German Finance Ministry makes first public statement of support. The article was the first public statement of a representative of the German Finance Ministry that they support certain types of covered bonds as high-quality liquid assets for LCR purposes under Basel III. To improve a banks ability to withstand liquidity disruptions, the LCR requests that a bank maintains an adequate level of unencumbered high-quality liquidity assets that can be converted into cash to meet its liquidity needs for a 30-calendar-day time horizon under a significantly severe liquidity stress scenario specified by supervisors. 30 Under its definition of high-quality liquid assets, Basel III then distinguishes between Level 1 assets, for which neither a cap nor a haircut applies, and Level 2 assets, for which a cap of 40% and a minimum haircut of 15% apply. Whilst the bulk of Level 1 assets will be sovereign bonds issued in the banks domestic currency, covered bonds are specifically mentioned as Level 2 assets.

If covered bonds were treated as high quality, Level 1 assets, refinancing risks would fall

Potential cap exemptions would fortify investor base and drive spreads lower. If some covered bonds have the benefit of an exemption from the 40% cap, this exemption would materially increase and stabilise the potential investor base for these covered bonds and reduce yields. Prospective covered bond issuers with access to a strong investor base, able to fund at low yields, will be more willing to refinance the assets of a troubled issuer meaning that access to, and costs of, refinancing for existing programmes is reduced. Refinancing risk, is a very significant risk for most programmes due to material longer dated asset/short dated liability mismatches and the difficulty of estimating the price at which a pool can be liquidated. European groups lobby to reclassify certain covered bonds as Level 1 assets. The treatment of covered bonds as Level 2 assets raises concerns for banks in countries where the supply of domestic sovereign bonds is insufficient to cover their needs under the LCR requirements. To address this issue, the Danish regulator (known as Finanstilsynet) has spearheaded an initiative, which has been joined by the Danish, German, Polish, Norwegian and Swedish covered bond lobbying groups, to treat certain covered bonds as Level 1 assets. These lobbying groups argue that certain covered bonds have been more liquid through the financial crisis than some sovereign bonds. The criteria the lobbying groups argue make covered bonds qualify as Level 1 assets include the following:

Banks in countries with a tight supply of domestic sovereign bonds would benefit if covered bonds were reclassified as Level 1 assets.

The minimum market size by volume of covered bonds issued in that jurisdiction is 50 billion 25% of all bonds outstanding issued by financial institutions within the jurisdiction are covered bonds

28 29 30

This is a reprint of a Special Comment released on 28th March 2011

http://www.rdf-online.de/ruwartikelpics/rdf/rdf0211s1.pdf Basel III: International Framework For Liquidity Risk Measurement, Standards And Monitoring, page 3 http://news.coveredbondreport.com/2011/04/basel-member-says-ec-should-stick-to-lcr-limits/

http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_SF241076

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The minimum market size of outstanding covered bonds is greater than 15% of national GDPs five-year average

Rachael Purchas Assistant Vice President Analyst 44.20.7772.5361 Rachael.Purchas@moodys.com Edward Manchester Senior Vice President 44.20.7772.5407 Edward.Manchester@moodys.com

Legal Corner: Jury Still Out on Impact of Proposed EU Framework Powers on Structured Transactions
European Commission (EC) proposals to give EU-based authorities wide-ranging powers to intervene in the operation of failing credit institutions will be credit neutral for structured finance transactions involving EU-based banks, provided that the final legislation incorporates appropriate safeguards and policy objectives. Certain provisions of the ECs proposed framework for crisis management in the European financial sector 31 (the EU Framework) resemble powers already granted under the UK Banking Act 2009, which we view as credit neutral. 32 As with the Banking Act, the EU Framework contemplates provisions to safeguard structured finance transactions and overriding policy objectives relating to the maintenance of financial stability. The EU Framework proposes giving authorities within the EU wide-ranging powers to intervene in the operation of failing credit institutions. The EU Framework could bestow wideranging powers on competent EU supervisory authorities. 33 The proposals include preventative measures, such as enhanced supervision and the preparation of resolution plans, as well as specific powers to allow early intervention in the operation and management of financial institutions. In addition, authorities could be granted various resolution powers designed to permit the orderly management of a failing institution, including powers of sale and transfer in relation to the institutions business and assets. The resolution powers could also include a bail-in mechanism for recapitalisation that may involve the write-down or conversion of unsecured debt, including senior debt. 34 The inclusion of safeguards and the maintenance of stability objectives in the EU Framework could indicate political desire to shield structured transactions from negative impact. The EU Framework contains virtually identical safeguards to those contained in the Banking Act, including limitations on the use of transfer powers in relation to structured finance transactions. Moreover, the EU Framework requires the relevant authority to respect stated objectives, including the avoidance of any adverse effect on financial stability, when exercising its powers. This suggests that the EU Framework is unlikely to be used in a way that causes disruption to the capital markets. We will need to see the final terms of the EU Framework before concluding on its credit impact. At this stage the resulting legislation has not been finalised and the proposals may be modified in light of the consultation process. However, to the extent that the powers in the final legislation are subject to appropriate safeguards and policy objectives as is already contemplated for certain powers in the proposal the credit impact will be neutral for structured finance transactions.
31

32

33

34

European Commission, COM (2010) 579, 20 October 2010, An EU Framework for Crisis Management in the Financial Sector and DG Internal Market and Services, 6 January 2011, Technical Details of a Possible EU Framework for Bank Recovery and Resolution. See Press Release dated 20 March 2009: Moodys Assesses the Possible Credit Impact of the UK Banking Act 2009 on Rated Structured Finance Transactions and Covered Bonds and Press Release dated 10 July 2009: Moodys Determines that the UK Banking Act 2009 does not Negatively Affect the Ratings of Structured Finance Transactions or Covered Bonds. The proposal states that the authority can be a supervisor (as defined in Directive 2006/48/EC), provided that there is a separation between resolution and supervisory functions. See Moodys Weekly Credit Outlook, 10 January 2011, European Commissions Bail-in Proposals Indicate Lower Support in future for Senior Bank Debt.

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SERVICERS-UPDATE

As part of our surveillance process of RMBS and ABS transactions, we meet regularly with servicers to monitor their quality of process and discuss any changes that may have occurred to the servicing infrastructure, since our previous visit. The quality of the servicer may have a positive, neutral or negative impact on the performance of the underlying collateral (e.g. delinquency rates or losses). As a result of this updated analysis, the servicing assumption within our structured finance methodology may be amended. Highlights from our recent visits are noted below.

Olga Gekht Vice President Senior Analyst 44.20.7772.8675 Olga Gekht@moodys.com

Santander UK UK Prime Mortgage Loans Servicer


Summary: In March 2011, we met with Santander UK (Aa3/P-1), which is the servicer for Holmes, Fosse and Langton Master Trusts. Overall, we consider Santander UKs servicing practices to be in line with the UK prime market average. We view their process for evaluating borrowers in arrears and determining the most appropriate loan modification approach for these borrowers as stronger than the market average. As described below, Santander UK utilises several collection systems for different loan sub-portfolios and outsources a portion of their early stage collections activity to a third-party servicer, which is different from some other market participants, who use a single integrated collection system. However, the collection strategies embedded in the various collection systems of Santander UK, as well as in the system of the thirdparty servicer, are closely aligned and the key activities and triggers in these systems are the same. Background: The bank is one of the largest lenders in the UK residential mortgage market. Santander UK was created in January 2010 following a name change for Abbey National plc, which was acquired in November 2004 by Banco Santander Central Hispano, S.A. (Banco Santander) of Spain. The Holmes Master Trust, which was set up by Abbey National, was part of the aforementioned acquisition. In October 2008, Banco Santander acquired Alliance & Leicester plc (A&L), which originated Fosse and Langton Master Trusts. Banco Santander subsequently transferred A&L to Santander UK and merged the operations of A&L, which included the servicing of Fosse and Langton master trust portfolios, with its existing UK operations. Performance: The Fosse and Langton Master Trusts are among the best performing transactions in the UK Prime RMBS sector. Despite the unfavourable macroeconomic environment and general increasing delinquencies trend, arrears levels in the Fosse and Langton Master Trusts remain significantly lower than the sector average. We believe that this level of performance could be the result of conservative origination criteria as well as the selection criteria for the loans in the trusts. The performance of the Holmes Master Trust, which is one of the oldest UK master trusts, is in line with the sector average. The portfolio backing the Holmes Master Trust has experienced a number of repossessions (4,071 as of December 2010) and foreclosures (3,813 as of December 2010). These numbers provide some evidence of the scope of Santander UKs servicing capacity. During the course of 2010, the loss severity exhibited by the Holmes Master Trust was lower than the market weighted average. Indeed, in the 12 months ending December 2010, the loss severity observed in the Holmes Master Trust was 17.5%, whereas the weighted average severity in UK RMBS master trusts was 20.4%.

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Collections/IT System: Santander UK uses different collection systems to perform the day-to-day servicing of mortgage loans (such as repayments, fees, changes to mortgages, extensions and redemptions). The collection system used depends on which originator originated the loan and when. Specifically, Santander UK services mortgages originated by A&L using a different system to the older loans originated by Abbey National. However, Santander UK services the majority of mortgages using its integrated system, which it also uses for any newly originated loans. Currently, the company scans all of its main mortgage documentation. However, scanned copies of the documents may not be available for older mortgages. Arrears Management: Santander UK contacts delinquent borrowers via telephone, letter, SMS, field agency and other tracing strategies. The servicer may also contact borrowers through an automated system, which would notify the borrower of any delinquency and has functionality enabling it to receive payments from the borrower. Santander UK categorises borrowers in arrears based on the loan-to-value (LTV) ratio of their mortgage, as well as other characteristics corresponding to specific borrower segments, such as borrowers using Support for Mortgage Interest (SMI). 35 The risk rating of the borrower determines the frequency of contact for this particular borrower and how quickly the mortgage progresses through the arrears management and foreclosure process. For all borrowers in arrears, collectors attempt to contact the borrower and complete an income/expenditure form for the household. This form together with the borrower information from the system allows the collector to determine whether a borrower may benefit from a loan modification plan, such as a longer term arrangement, repayment plan modification or an interest-only conversion and whether such a plan would be affordable for the borrower. Santander UK monitors the performance of modified loans on a regular basis. Thus far, borrowers have successfully been making payments on the modified loan repayment plans in over 80% of cases. Santander UK refers borrowers who show significant amounts of additional debt, either through credit score checks or their income/expenditure form, to financial consulting firms. These firms perform a detailed assessment of a borrowers expenditure and circumstances taking into account the full indebtedness of the borrower. Santander UK outsources the servicing of approximately 25% of loans in arrears (randomly selected) to a third-party servicer, Wescot. External collectors employed by Wescot follow the same procedure as Santander UK internal collectors and have access to the same systems and tools. The performance of external collectors is evaluated by the management of Santander UK on an ongoing basis. Possessions: The litigation team works with a panel of external solicitors to obtain a possession hearing and a subsequent court order. When an external solicitor takes over the mortgage servicing process (usually by month five of delinquency), Santander UK transfers all contact with the borrower to the solicitors, who, in addition to the legal aspect, handle any loan modification discussions with the borrower. The external solicitors have access to the same servicing system as the collectors, which allows them to perform income/expenditure assessments and to tailor any loan modifications to the borrowers specific circumstances. Santander UK also has an internal team of solicitors, who monitor the panel and work on about 25% of all litigation cases. After the property has been repossessed, asset management companies perform a property valuation and market the property. If the property is in very bad condition, it may be sold through an auction house, but these cases are very rare and most properties are sold by asset managers. This process takes approximately 18 weeks from the date of possession.

35

The Support for Mortgage Interest (SMI) scheme, which is administered by the Department for Work and Pensions, helps borrowers receiving government benefits with their mortgage interest payments.

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Management/Staff: The management team has considerable experience in the mortgage industry. The individual experience of the arrears management staff and the solicitors varies from 3 months to over 25 years. A systematic training program is available for new joiners as well as an ongoing training program for more experienced staff. Quality Control: The internal audit department is independent and checks arrears collections and recoveries teams regularly for quality purposes and to ensure compliance with the collection policy of Santander UK.

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ASK MOODY'S

Elise Lucotte Vice President - Senior Analyst 33.1.53.30.10.22 Elise.Lucotte@moodys.com Alexis Michon Assistant Vice President - Analyst 33.1.53.30.59.70 Alexis.Michon@moodys.com

Does French Court Ruling in Coeur Dfense Case Increase Vulnerability of French ABS and RMBS Transactions to Insolvency Risk?
On 8 March 2011, the decision by the French Supreme Court in the Coeur Dfense case implicitly confirmed the availability of insolvency-law protection to corporate special-purpose vehicles (SPVs) 36 and proved to be a further negative development in the case. However, the vast majority of asset-backed securities (ABS) and residential mortgage-backed securities (RMBS) transactions affected by the decision use French securitisation vehicles, which are bankruptcy remote by operation of law. 37 As such, they cannot be subject to any insolvency proceedings and are thus safeguarded. Consequently, the negative credit implications of this decision on ABS and RMBS transactions is ultimately limited to the rare transactions using French corporate SPVs to isolate underlying tangible assets. HOW DOES THE COURT RULING IMPACT TRANSACTIONS USING FRENCH CORPORATE SPVS TO ISOLATE UNDERLYING TANGIBLE ASSETS? Decision clarifies the legal test to file for safeguard. The French Supreme Courts decision relates to the commercial mortgage-backed securities (CMBS) transaction, Windermere XII FCT. It clarifies that the test under French law for a valid filing for safeguard proceedings (Chapter 11 la franaise) can only be satisfied when the company is facing difficulties, which it is unable to overcome. Any other consideration is irrelevant when applying the test. The Supreme Court consequently disregards other circumstances mentioned by the Court of Appeal. In particular, the intention of the party filing for bankruptcy to bypass its contractual obligations is not part of the legal test. Similarly, there is no need to demonstrate any link between the difficulties and the core business of the company. Decision renders it easier to file for safeguard. Strict application of the legal test prescribed by the Supreme Court renders it easier to file for the safeguard of French corporate SPVs. Although the 2010 decision had created some hope in the securitisation market that the legal test may be stricter for corporate SPVs than for other companies, the recent court decision confirms that the test is identical for all companies, and no specific circumstances should be taken into account for corporate SPVs. Safeguard negatively impacts noteholders. Should a French corporate SPV successfully file for safeguard proceedings, we identify three key risks for noteholders:

Noteholders will have their enforcement rights limited: As in Coeur Dfense, the directors of a French borrowing SPV could take advantage of the safeguard proceedings to prevent creditors from enforcing security on the assets. This highlights the critical role of corporate governance rules. Any corporate SPV managed by independent directors would be less exposed to conflicts of interests between equity holders and other creditors (including noteholders).
See our publications on the court decisions: French Court Ruling Increases Risk of Safeguard Proceedings in European CMBS, Moodys Weekly Credit Outlook, 14 March 2011, French Court Ruling Reassures European Lending and Securitisation market, Moody's Weekly Credit Outlook, 8 March 2010. Organismes de titrisation, which can be either fonds commun de titrisation (previously fonds commun de crances) or socits de titrisation.

36

37

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Noteholders could lose control over the repayment process. A safeguard plan could impose a rescheduling of debts, which would be detrimental to creditors. Noteholders face an increased risk of interest shortfalls on their notes. As from filing, and until a safeguard plan is adopted, no debt-service payment can be made to creditors. However, this risk can be mitigated by appropriate liquidity arrangements reducing the risk of an interest shortfall on the notes.

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SUMMARY OF OUR INDICES AND ECONOMIC STAT DASHBOARD38

Virginie Ketterlin Business Administrator 49.69.70730.772 Virginie.Ketterlin@moodys.com Patrick Madagua Financial Data Associate 49.69.70730.723 Patrick.Madagua@moodys.com

TABLE 1

France
As of Moodys Aggregate Indices As of y-o-y %

Autos: Outstanding Balances Delinquency (60+ Days) Cumulative Defaults Cumulative Losses
39

Jan 2011 Jan 2011 Jan 2011 Jan 2011 Q4 2010 Feb 2011 Q4 2010 Mar 2011

2.5bn 0.54% 2.10% 0.25% 1.5% 9.6% 9.4% 83.3

Jan 2010 Jan 2010 Jan 2010 Jan 2010 Q4 2009 Feb 2010 Q4 2009 Mar 2010

3.0bn 0.70% 1.77% 0.20% -0.5% 9.8% -4.4% 88.2

-17.3% -22.6% 18.9% 28.5%

Key Economic Data: GDP Growth Rate (y-o-y) Unemployment Rate House Price Inflation (y-o-y) Consumer Confidence (Balance)
TABLE 2

-2.0%

Germany
As of Moodys Aggregate Indices As of y-o-y %

Autos: Outstanding Balances Delinquency (60+ Days) Cumulative Defaults Cumulative Losses
40

Jan 2011 Jan 2011 Jan 2011 Jan 2011 Q4 2010 Nov 2010 Feb 2011 2009 Mar 2011

10.8bn 0.48% 0.67% 0.45% 4.0% 9,685 6.3% 1.7% 6.0

Jan 2010 Jan 2010 Jan 2010 Jan 2010 Q4 2009 Nov 2009 Feb 2010 2008 Mar 2010

13.5bn 0.49% 0.58% 0.28% -2.0% 8,882 7.3% 1.1% 3.2

-19.6% -2.8% 16.5% 59.1%

Key Economic Data: GDP Growth Rate (y-o-y) Number of Personal Insolvencies Unemployment Rate House Price Inflation (y-o-y) Consumer Confidence (Balance) 9.0% -13.7%

38

39

40

If not stated otherwise, ratios such as delinquencies, outstanding repossessions or cumulative losses are calculated over the outstanding balance of the securitised pool. Ratios such as cumulative defaults or losses are calculated over the original balance of the securitised pool (plus cumulative replenishments since inception, if applicable). For further details, please refer to Appendix 1 of the individual indices reports. Outstanding balances under the header of Moodys Aggregate Indices refer to rated outstanding balances rather than total balances in the country. If losses were not available, Moodys has used as proxy in these instances the difference between cumulative defaults minus cumulative recoveries. If losses were not available, Moodys has used as proxy in these instances the difference between cumulative defaults minus cumulative recoveries.

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TABLE 3

Greece
As of Moodys Aggregate Indices As of y-o-y %

RMBS: Outstanding Balances Delinquency (60+ Days) Delinquency (90+ Days) Cumulative Defaults SME: Outstanding Balance Delinquency (60+ Days) Delinquency (90+ Days) Cumulative Defaults Consumer Loans: Outstanding Balances Delinquency (60+ days) Delinquency (90+ days) Cumulative Defaults Key Economic Data: GDP Growth Rate (y-o-y) Unemployment Rate Q4 2010 Dec 2010 -6.6% 14.1% Q4 2009 Dec 2009 -3.2% 10.2% 38.2% Jan 2011 Jan 2011 Jan 2011 Jan 2011 4.7bn 10.19% 9.46% 6.37% Jan 2010 Jan 2010 Jan 2010 Jan 2010 5.1bn 8.55% 7.73% 2.98% -6.9% 19.3% 22,3% 113.9% Jan 2011 Jan 2011 Jan 2011 Jan 2011 13.2bn 3.21% 1.50% 2.50% Jan 2010 Jan 2010 Jan 2010 Jan 2010 17.0bn 2.30% 1.03% 1.71% -22.0% 39.7% 46.0% 46.3% Jan 2011 Jan 2011 Jan 2011 Jan 2011 4.8bn 2.92% 1.74% 0.68% Jan 2010 Jan 2010 Jan 2010 Jan 2010 7.9bn 1.52% 0.63% 0.42% -39.3% 92.2% 176.2% 60.0%

TABLE 4

Ireland
As of Moodys Aggregate Indices As of y-o-y %

RMBS (Prime): Outstanding Balances Delinquency (90+ Days) Defaults (360+ Days) Key Economic Data: GDP Growth Rate (y-o-y) Unemployment Rate House Price Inflation (y-o-y) Consumer Confidence (Balance) Q4 2010 Feb 2011 Q4 2010 Feb 2011 -0.6% 14.9% -10.8% 50.3 Q4 2009 Feb 2010 Q4 2009 Feb 2010 -5.5% 12.8% -18.5% 59.4 16.4% Jan 2011 Jan 2011 Jan 2011 40.4bn 6.22% 1.82% Jan 2010 Jan 2010 Jan 2010 43.0bn 3.36% 0.74% -5.9% 85.0% 146.8%

TABLE 5

Italy

As of Moodys Aggregate Indices

As of

y-o-y %

RMBS: Outstanding Balances Delinquency (60+ Days) Delinquency (90+ Days) Feb 2011 Feb 2011 Feb 2011 97.6bn 2.07% 1.57% Feb 2010 Feb 2010 Feb 2010 103.3bn 2.26% 1.68% -5.5% -8.1% -6.9%

23

MOODYS CREDIT INSIGHT

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TABLE 5

Italy

As of

As of

y-o-y %

Cumulative Defaults Cumulative Losses (Net Defaults) Autos: Outstanding Balances Delinquency (60+ Days) Cumulative Defaults Cumulative Losses 42 Consumer Loans: Outstanding Balances Delinquency (90-180 days) Cumulative Defaults Key Economic Data: GDP Growth Rate (y-o-y) Bad (Household) Debtors Unemployment Rate House Price Inflation (y-o-y) Consumer Confidence (Balance) Mortgage Outstanding
43 41

Feb 2011 Feb 2011 Jan 2011 Jan 2011 Jan 2011 Jan 2011 Jan 2011 Jan 2011 Jan 2011 Q4 2010 Q1 2010 Feb 2011 2010 Mar 2011

2.04% 1.59% 2.1bn 0.72% 0.97% 0.65% 9.3bn 0.31% 3.45% 1.3% 525,046 8.4% -2.5% -24.2

Feb 2010 Feb 2010 Jan 2010 Jan 2010 Jan 2010 Jan 2010 Jan 2010 Jan 2010 Jan 2010 Q4 2009 Q1 2009 Feb 2010 2009 Mar 2010

1.48% 1.16% 2.6bn 0.77% 0.79% 0.48% 8.2bn 0.50% 2.62% -2.8% 417,870 8.4% -6.6% -22.0

38.1% 36.8% -20.4% -6.0% 22.5% 34.2% 13.2% -38.3% 31.4%

25.6% 0.0%

Q3 2010 316.4bn

Q3 2009 248.6bn

27.3%

TABLE 6

Netherlands
As of Moodys Aggregate Indices As of y-o-y %

RMBS: Outstanding Balances Delinquency (60+ Days) Cumulative Defaults Cumulative Losses Key Economic Data: GDP Growth Rate (y-o-y) Number of Personal Bankruptcies Unemployment Rate House Price Inflation (y-o-y) Consumer Confidence (Balance) Q4 2010 Jan 2011 Feb 2011 Q4 2010 Mar 2011 2.1% 168 4.3% 1.7% -8.0 Q4 2009 Jan 2010 Feb 2010 Q4 2009 Mar 2010 -2.4% 202 4.5% -1.9% -13.0 -16.8% -4.4%
44

Jan 2011 228.2bn Jan 2011 Jan 2011 Jan 2011 0.73% 0.63% 0.05%

Jan 2010 222.9bn Jan 2010 Jan 2010 Jan 2010 0.62% 0.44% 0.04%

2.4% 18.3% 42.7% 20.4%

41

42

43

44

Note that this ratio is calculated as outstanding defaults (if not available, cumulative defaults minus cumulative recoveries) divided by the original balance. If losses were not available, Moodys has used as proxy in these instances the difference between cumulative defaults minus cumulative recoveries. The total number of loans outstanding to persons who have been declared insolvent or who are in a similar situation. Note that this ratio considers foreclosures, credit events or credit event notices if defaults are not reported for specific transactions.

24

MOODYS CREDIT INSIGHT

APRIL 2011

TABLE 7

Portugal
As of Moodys Aggregate Indices As of y-o-y %

RMBS: Outstanding Balances Delinquency (60+ Days) Outstanding Defaults 45 Cumulative Losses
46

Jan 2011 Jan 2011 Jan 2011 Jan 2011 Q4 2010 Feb 2011 Feb 2011 Mar 2010

23.6bn 1.38% 1.59% 0.75% 1.2% 11.1% -2.8% -47.7

Jan 2010 Jan 2010 Jan 2010 Jan 2010 Q4 2009 Feb 2010 Feb 2010 Mar 2009

23.3bn 1.63% 1.45% 0.64% -1.0% 10.5% 3.5% -37.4

1.0% -14.9% 9.5% 16.9%

Key Economic Data: GDP Growth Rate (y-o-y) Unemployment Rate House Price Inflation (y-o-y) Consumer Confidence (Balance)
TABLE 8

5.7%

Spain
As of Moodys Aggregate Indices As of y-o-y %

RMBS (Prime): Outstanding Balances Delinquency (60+ Days) Delinquency (90+ Days) Cumulative Defaults Autos: Outstanding Balances Delinquency (60+ Days) Cumulative Defaults Cumulative Losses Consumer Loans: Outstanding Balances Delinquency (90-180 Days) Cumulative Defaults SME Outstanding Balances Delinquency (90-360 Days) Key Economic Data: GDP Growth Rate (y-o-y) Doubtful (Household) Debtors Ratio
48
47

Jan 2011 154.6bn Jan 2011 Jan 2011 Jan 2011 Jan 2011 Jan 2011 Jan 2011 Jan 2011 Jan 2011 Jan 2011 Jan 2011 Dec 2010 Dec 2010 Q4 2010 Q3 2010 1.59% 0.90% 1.80% 1.2bn 4.12% 3.12% 2.51% 7.5bn 0.35% 3.75% 43.9bn 1.72% 0.6% 2.62%

Jan 2010 156.6bn Jan 2010 Jan 2010 Jan 2010 Jan 2010 Jan 2010 Jan 2010 Jan 2010 Jan 2010 Jan 2010 Jan 2010 Dec 2009 Dec 2009 Q4 2009 Q3 2009 2.34% 1.56% 1.46% 1.1bn 5.89% 2.48% 2.10% 9.9bn 0.55% 2.83% 47.4bn 2.29% -3.0% 3.05%

-1.3% -32.0% -42.0% 23.3% 14.6% -30.1% 26.0% 19.4% -23.6% -37.7% 32.2% -7.4% -25.1%

-1.4%

45 46

47

48

If defaults were not available, Moodys used as proxy in these instances 360+ day delinquencies. If losses were not available, Moodys used as proxy in these instances the difference between cumulative defaults minus cumulative recoveries. If losses were not available, Moodys used as proxy in these instances the difference between cumulative defaults minus cumulative recoveries. Refers to doubtful loans to households for house purchases as a ratio of all loan advances to households for house purchases that remain on the balance sheet of banks.

25

MOODYS CREDIT INSIGHT

APRIL 2011

TABLE 8

Spain
As of As of y-o-y %

Unemployment Rate House Price Inflation (y-o-y) Consumer Confidence (Balance) Mortgage Approvals (Number)

Feb 2011 Q4 2010 Mar 2011 Jan 2011

20.5% -3.5% 68.3 75,621

Feb 2010 Q4 2009 Mar 2010 Jan 2010

19.3% -6.3% 72.7 90,045

6.2%

-16.0%

TABLE 9

UK

As of Moodys Aggregate Indices

As of

y-o-y %

RMBS (Prime): Outstanding Balances Delinquency (90+ Days) Outstanding Repossessions Cumulative Losses RMBS (Non-conforming): Outstanding Balances Delinquency (90+ Days) Outstanding Repossessions Cumulative Losses RMBS (Buy-to-Let): Outstanding Balances Delinquency (90+ Days) Outstanding Repossessions Cumulative Losses Credit Cards: Charge-off Rate (annualised) Delinquency Rate Payment Rate Gross Yield (annualised) Excess Spread (annualised) Key Economic Data: GDP Growth Rate (y-o-y) Number of Personal Insolvencies Unemployment Rate House Price Inflation (y-o-y) Consumer Confidence (Balance) Mortgage Approvals (Number) Visa and Mastercard Debt Outstanding Q4 2010 Q4 2010 Dec 2010 Mar 2011 Mar 2011 Feb 2011 Feb 2011 1.5% 30,729 7.9% -3.3% -28.0 102,871 59.6bn Q4 2009 Q4 2009 Dec 2009 Mar 2010 Mar 2010 Feb 2010 Feb 2010 -2.8% 35,574 7.7% 6.9% -15.0 98,906 63.2bn 4.0% -5.6% -13.6% 2.6% Feb 2011 Feb 2011 Feb 2011 Feb 2011 Feb 2011 6.50% 5.22% 18.70% 20.09% 10.74% Feb 2010 Feb 2010 Feb 2010 Feb 2010 Feb 2010 9.24% 6.54% 16.97% 18.70% 7.36% -29.6% -20.2% 10.2% 7.4% 45.9% Feb 2011 Feb 2011 Feb 2011 Feb 2011 26.1bn 1.96% 0.14% 0.38% Feb 2010 Feb 2010 Feb 2010 Feb 2010 23.9bn 3.35% 0.19% 0.17% 9.4% -41.6% -24.9% 126.1% Feb 2011 Feb 2011 Feb 2011 Feb 2011 22.9bn 17.33% 0.84% 1.90% Feb 2010 Feb 2010 Feb 2010 Feb 2010 25.5bn 19.22% 1.48% 1.52% -10.0% -9.8% -43.5% 25.2% Feb 2011 329.2bn Feb 2011 Feb 2011 Feb 2011 1.92% 0.12% 0.17% Feb 2010 355.3bn Feb 2010 Feb 2010 Feb 2010 1.91% 0.10% 0.12% -7.3% 0.5% 21.7% 50.2%

26

MOODYS CREDIT INSIGHT

APRIL 2011

KEY RATING ACTIONS AND REVIEWS

ABS & RMBS


SPANISH ABS AND RMBS: RATING ACTIONS ON SPANISH BANKS PROMPT ABS/RMBS RATINGS REVIEW On 25 March, we placed on review for possible downgrade the ratings of 35 tranches in 21 Spanish RMBS and 3 Spanish ABS following the downgrades of Spanish financial institutions. PORTUGUESE ABS AND RMBS: MULTIPLE TRANCHES DOWNGRADED On 12 April, we downgraded the ratings of 5 tranches of Portuguese ABS and 18 tranches of RMBS transactions to Aa2(sf) and 4 tranches of ABS and 20 tranches of RMBS transactions to A1(sf). The downgrades followed our successive downgrades of Portugal's government rating from A1 to A3 on 15 March 2011 and from A3 to Baa1 on 5 April 2011.

RMBS:
SPANISH RMBS: RURAL HIPOTECARIO IX FTA NOTES DOWNGRADED On 8 April, we downgraded the rating of all notes issued by RURAL Hipotecario IX. The downgrade concluded the review for possible downgrade and took into consideration the worsethan-expected performance of the collateral. SPANISH RMBS: AYT HIPOTECARIO MIXTO III FTA NOTES DOWNGRADED On 18 March, we downgraded the rating of all notes issued by AyT Hipotecario Mixto III FTA. The downgrade concluded the review for possible downgrade and took into consideration the worse-than-expected performance of the collateral. IRISH NON-CONFORMING RMBS: LANSDOWNE MORTGAGE SECURITIES 1 AND 2 DOWNGRADED On 17 March, we downgraded the ratings of seven notes issued by Lansdowne Mortgage Securities 1 and 2. The downgrades, which affect 324.85 of debt securities, were driven by the poor and rapidly deteriorating performance of the collateral in these two transactions as a result of the weakened macroeconomic environment. SPANISH RMBS: VALENCIA HIPOTECARIO 2, 3 AND 4 NOTES DOWNGRADED On 11 March, we downgraded the ratings of all notes issued by Valencia Hipotecario 2, Valencia Hipotecario 3 and Valencia Hipotecario 4. The downgrades, which affect approximately 1.8 billion of rated debt securities, took into consideration the worse-than-expected performance of the collateral. It also reflects our negative sector outlook for Spanish RMBS and the weakening of the macroeconomic environment in Spain, including high unemployment rates. IRISH PRIME RMBS: DOWNGRADE OF 17 TRANSACTIONS On 10 March, we downgraded the ratings of 50 tranches in 17 prime Irish RMBS. The downgrades, which affect approximately 31.4 billion of securities, were due principally to the weak and rapidly deteriorating performance of the collateral as a result of the weakened macroeconomic environment and the increased operational risks linked to the weaker credit quality of Irish banks acting as key transaction parties.

27

MOODYS CREDIT INSIGHT

APRIL 2011

ABS:
SPANISH ABS: NOTES ON 7 SPANISH ABS WITH GOVT GUARANTEE DOWNGRADED On 25 March, we downgraded to Aa2(sf) from Aa1(sf) the ratings of the notes in six ABS transactions backed by loans to small and medium enterprises (SMEs) and the ratings of two notes in an ABS transaction backed by payment rights in relation with Spanish electricity tariff deficits. OPERATING LEASE ABS: EURO FREIGHT CAR FINANCE S.A. NOTES DOWNGRADED On 23 March, we downgraded the rating of notes issued by Euro Freight Car Finance S.A. to Baa3(sf) from Aa2(sf). The downgrade of the notes was mainly prompted by our view that the credit quality of the Ahaus Alsttter Eisenbahn ("AAE") group, who acts as originator and servicer in the transaction, has deteriorated in the current environment when compared to closing of the transaction. SPANISH ABS: NOTES ON TRANSACTIONS SUPPORTED BY VALENCIA DOWNGRADED On 17 March, we downgraded to A2 from A1 the ratings on the notes issued in two transactions whose performance relies on support from Generalitat de Valencia (Valencia), rated A2, and a financial guarantee provided by MBIA Insurance Corporation (MBIA), rated B3. The downgrades of the notes followed Valencia's downgrade to A2 from A1 on 11 March 2011.

28

MOODYS CREDIT INSIGHT

APRIL 2011

IN THE PIPELINE

ABS:

In Q1 2011, the ABS pipeline contained quite a number of transactions, as a result of: (i) the focus on repo-eligible transactions, where we provide a second rating on securities to comply with European Central Bank (ECB) rating requirements; and (ii) increasing investor confidence, supported by a number of transactions placed with investors. Asset securitisation activity is mainly concentrated in the auto loan and auto lease sectors in various European jurisdictions, followed by consumer loan- and credit card-related assets. Activity in traditional markets in Spain and Germany remains consistent, while there has been an increase in activity in UK, Italy and France. SME activity has also dramatically picked up, particularly in Spain where several transactions have been launched. Mixed-pool leases to SMEs in Italy have made a huge return in 2011, with a number of transactions rated in Q1 2011. We continue to see increasing interest in new EMEA jurisdictions and in non-standard asset classes in various EMEA markets, and regard this as a positive signal for markets opening up on the supply side.

RMBS:

In Q1 2011, the RMBS pipeline contained quite a number of transactions, as a result of: (i) the focus on repo-eligible transactions, where we provide a second rating on securities to comply with ECB rating requirements; and (ii) increasing investor confidence, supported by a number of transactions placed with investors. Going forward, we see a very active pipeline of issuance intended for public and private placement. The UK prime sector continues to be the most active market, in which we believe issuance will be dominated by public placement. The Dutch sector also continues to see a steady deal flow, followed by Italy where issuance is gathering some momentum.

29

MOODYS CREDIT INSIGHT

APRIL 2011

RMBS AND ABS BULLETIN BOARD

Events
AMSTERDAM EUROPEAN SECURITISATION CONFERENCE On 13 and 14 April, we are sponsoring the European Securitisation Conference in Amsterdam. LONDON CREDITFLUX CLO SYMPOSIUM On 17 May, we are sponsoring Creditfluxs CLO Symposium in London. BRUSSELS IMN GLOBAL ABS

On 14 and 15 June, we are sponsoring the IMN Global ABS conference in Brussels.

30

MOODYS CREDIT INSIGHT

APRIL 2011

Moodys Credit Insight Editorial Board


Jean Dornhofer Strategic Research and Outreach Jean.Dornhofer@moodys.com Alex Cataldo ABS Alex.Cataldo@moodys.com Nitesh Shah Strategic Research and Outreach Nitesh.Shah@moodys.com Neal Shah RMBS Neal.Shah@moodys.com Annick Poulain Surveillance Annick.Poulain@moodys.com Ariel Weil Surveillance Ariel.Weil@moodys.com

31

MOODYS CREDIT INSIGHT

APRIL 2011

2011 Moodys Investors Service, Inc. and/or its licensors and affiliates (collectively, MOODYS). All rights reserved. CREDIT RATINGS ARE MOODY'S INVESTORS SERVICE, INC.'S (MIS) CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MIS DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS DO NOT CONSTITUTE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS ARE NOT RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. CREDIT RATINGS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MIS ISSUES ITS CREDIT RATINGS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODYS PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODYS from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided AS IS without warranty of any kind. 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, MOODYS is not an auditor and cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall MOODYS have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODYS or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODYS is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained herein must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODYS IN ANY FORM OR MANNER WHATSOEVER. 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Any publication into Australia of this document is by MOODYS affiliate, Moodys Investors Service Pty Limited ABN 61 003 399 657, which holds Australian Financial Services License no. 336969. This document is intended to be provided only to wholesale clients within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODYS that you are, or are accessing the document as a representative of, a wholesale client and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to retail clients within the meaning of section 761G of the Corporations Act 2001. Notwithstanding the foregoing, credit ratings assigned on and after October 1, 2010 by Moodys Japan K.K. (MJKK) are MJKKs current opinions of the relative future credit risk of entities, credit commitments, or debt or debt-like securities. In such a case, MIS in the foregoing statements shall be deemed to be replaced with MJKK. MJKK is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly owned by Moodys Overseas Holdings Inc., a wholly-owned subsidiary of MCO. This credit rating is an opinion as to the creditworthiness or a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors. It would be dangerous for retail investors to make any investment decision based on this credit rating. If in doubt you should contact your financial or other professional adviser.

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