2008-05-07 23:55:11 -
- Fitch Ratings has downgraded five classes of notes issued by Davis Square Funding III, Ltd (Davis Square III). The following rating actions are effective immediately:
--$332,465,078 class A-1LT-a to 'BB' from 'AAA';
--$986,543,258 floating-rate class A-1LT-b-1 to 'BB' from 'AAA';
--$60,500,000 class A-2 to 'B' from 'AAA';
--$20,000,000 class B to 'CCC' from 'AA';
--$64,869,933 class C to 'C' from 'A-'.
Classes A-1LT-a, A-1LT-b-1 and A-2 remain on Rating Watch Negative, while the class B and C notes are removed from Rating Watch Negative.
Davis Square III is a collateralized debt obligation (CDO) that closed on Oct. 21, 2004 and is managed by TCW Asset Management, Co. Davis Square III's reinvestment period ended in March 2008. Davis Square III contained a commercial paper (CP) class which was put to CALYON as of the Aug. 31, 2007 trustee report. The put was exercised because the CP notes could not be remarketed at the maximum remarketing spread. The class A-1LT-b-1 notes were issued in exchange of the CP upon the exercise of the put agreement and are pari passu in seniority with the class A-1LT-a notes.
Davis Square III has a portfolio comprised primarily of subprime residential mortgage-backed securities (RMBS) bonds (49%), Alternative-A (Alt-A) RMBS (20%), prime RMBS (6%), structured finance (SF) CDOs (10%) and other SF assets. Subprime RMBS, Alt-A and SF CDO bonds of the 2005, 2006, and 2007 vintages account for approximately 24%. Subprime RMBS, Alt-A and SF CDO bonds from other vintages account for 53.5% of the portfolio.
Fitch's rating actions reflect the significant collateral deterioration within the portfolio. Since September 2007, approximately 20% of the portfolio has been downgraded. The negative credit migration is primarily attributable to credit deterioration in subprime RMBS bonds from the 2005, 2006 and 2007 vintages, coupled with significant downgrades in SF CDOs originated between 2005 and 2007. This negative credit migration has caused under collateralization and as a result the class A/B overcollateralization (OC) test is failing with a ratio of 100.78% compared to its trigger of 103%. The failing coverage test has stopped all payments to the class C notes as interest and principal proceeds are diverted to amortize the class A-1 notes after paying class B interest. Fitch does not expect the class A/B coming back into compliance in the future. According to Fitch's analysis approximately 13.9% of the portfolio is of speculative credit quality with approximately 7.9% rated 'CCC' or lower
The Rating Watch Negative reflects the continued credit deterioration in subprime RMBS and SF CDOs with underlying exposure to subprime RMBS, as well as growing concerns with the performance of Alt-A RMBS, as well as a large percentage (13.3%) of the portfolio that remains on Rating Watch Negative. Additionally, Fitch is reviewing its SF CDO approach and will comment separately on any changes and potential rating impact at a later date.
The ratings of the class A and B notes address the likelihood that investors will receive ultimate interest and deferred interest payments, as per the governing documents, as well as the aggregate outstanding amount of principal by the legal final maturity date. The rating of the C notes addresses the ultimate payment of interest at a rate of 2% on, and ultimate payment of an amount equal to the original principal amount of, such class.
Fitch will continue to monitor and review this transaction for future rating adjustments. Additional transaction information and historical data are available on the Fitch Ratings web site at www.fitchratings.com.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Fitch Ratings, New York
Kevin Kendra, 212-908-0760
Brian Vorderbrueggen, 212-908-9102
Alina Pak, 312-368-3184, Chicago
or
Media Relations:
Sandro Scenga, 212-908-0278
