NEW YORK - (Business Wire) Fitch Ratings has affirmed one and downgraded four classes of notes issued by Solstice ABS CDO III, Ltd. (Solstice III) as a result of continued credit deterioration in the portfolio since Fitch's last rating action in August 2008. Approximately 78.9% of the portfolio has been downgraded since the last review. The details of the rating action follow at the end of this press release. The downgrades to the portfolio have left approximately 80.5% of the portfolio with a Fitch derived rating below investment grade and 53.6% with a rating in the 'CCC' rating category or lower, compared to 37.3% and 25.2%, respectively at the last review. According to the Sept. 28, 2009 trustee report, 42.3% of the portfolio is considered defaulted per the transaction's governing documents, compared to 13.9% at last review.
This review was conducted under the framework described in the report 'Global Rating Criteria for Structured Finance CDOs' using the Portfolio Credit Model (PCM) for projecting future default levels for the underlying portfolio.
Despite the degree of credit deterioration within the portfolio, the class A-1 notes have amortized significantly such that its credit enhancement remains consistent with an 'AAA' rating loss rate. There is sufficient cushion above the 'AAA' rating loss rate to outweigh the negative impact of principal proceeds currently being used to pay part of class B accrued interest.
The class A-1 notes are assigned a Negative Rating Outlook due to the concentration of residential mortgage-backed securities (RMBS) and structured finance collateralized debt obligations (SF CDOs) in the portfolio, which are expected to continue to face ratings volatility in the next one to two years.
The class A-1 notes are assigned a Loss Severity (LS) rating of 'LS5'. The LS rating indicates a tranche's potential loss severity given default, as evidenced by the ratio of tranche size to the base-case loss expectation for the collateral, as explained in 'Criteria for Structured Finance Loss Severity Ratings'. The LS rating should always be considered in conjunction with the probability of default for tranches.
Due to the significant collateral deterioration, all PCM rating loss rates exceed the credit enhancement available to classes A-2, B, C-1 and C-2. For these classes, Fitch compared the respective credit enhancement levels to the amount of underlying assets considered defaulted.
While the class A-2 and class B notes are receiving current interest distributions, given the expected low recoveries for the defaulted securities, the class A-2 notes are not expected to receive full principal repayment by maturity, and the class B notes are not expected to receive any principal repayment. Therefore the class A-2 and class B notes are downgraded to 'C', indicating Fitch's opinion that default is inevitable at or prior to maturity.
The class C-1 and C-2 notes are not receiving interest distributions due to the failing class A/B coverage tests and are not expected to receive any proceeds going forward. The class C notes are downgraded to 'C' to indicate Fitch's belief that default is inevitable at or prior to maturity.
Solstice III is a SF CDO that closed on Nov. 13, 2003 and is monitored by Rabobank International. The portfolio is composed of RMBS (54.4%), SF CDOs (20.2%), Corporate CDOs (14.4%), asset-backed securities (6.9%), and commercial mortgage-backed securities (4.1%).
Fitch affirms and assigns a LS rating and Outlook to the following class of Solstice III:
--$22,966,836 class A-1 notes at 'AAA/LS5'; Outlook Negative.
Fitch downgrades the following classes of Solstice III:
--$107,500,000 class A-2 notes to 'C' from 'BBB-';
--$47,500,000 class B notes to 'C' from 'B-';
--$20,469,500 class C-1 notes to 'C' from 'CC';
--$5,544,430 class C-2 notes to 'C' from 'CC'.
These rating actions reflect the application of Fitch's current criteria which are available at www.fitchratings.com and specifically include the following reports:
--'Global Structured Finance Rating Criteria' (Sept. 30, 2009);
--'Global Rating Criteria for Structured Finance CDOs' (Dec. 16, 2008);
--'Criteria for Structured Finance Loss Severity Ratings' (Feb. 17, 2009).
Additional information is available at www.fitchratings.com.
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Fitch Ratings, New York
Alina Pak, +1-312-368-3184 (Chicago)
Kevin Kendra, +1-212-908-0760 (New York)
or
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