EuropeLoan Finance N.V is poised to hit its biggest kink yet with the announcement earlier this month that its originator and administrator - internet based lender EuropeLoan N.V - is forging ahead with its plans to file bankruptcy and cease all its lending capabilities.

The E110million securitization of the mortgage lender's Swedish mortgage portfolio already encountered its first credit fiasco a few months after it priced earlier this year. The transaction's original primary servicer, Hedera Affasaadministrtion AB, became insolvent and the transaction then had to call up its back-up servicer, Cerdo Bankpartner AB.

The transaction might be exposed to a new world of third-party risks now that its originator has declared bankruptcy. The deal's latest performance report indicates that only two properties included in the pool were in foreclosure as of October 2002. Analysts at Deutsche Bank Securities said that the performance pool displays a relative low loan-to-value ratio of 54% and the reported cumulative delinquency rate is 0.7% of the current outstanding balance.

According to Fitch Ratings, it is likely that the uncertainty of the situation might increase arrears. Market sources said that the EuropeLoan Finance transactions is performing well from a credit perspective and should benefit from the various levels of protections the transaction has against servicer risk. Fitch also said that EuropeLoan's administrator duties would be relegated to Bank of New York.

As was the case when the primary servicer filed for bankruptcy in August, Cerdo will also assume responsibility for servicing the role of EuropeLoan. At that point, Cerdo would service not only the loans that are performing but also those that are more than 35 days in arrears.

But not everyone is satiated with this scenario, and Cerdo's ability to take on an expanded role. It's unclear, for example, whether Cerdo's special servicing capabilities are up to par with its primary servicing capabilities. The rating agencies have expressed these concerns by placing the transaction on watch until it is determined how the parties will perform in their new roles.

According to Deutsche Bank, if Cerdo is unable to perform the special servicing role, triple-B minus credit ABB Credit Finans AB will likely takeover the servicing function.

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