2008-08-25 23:41:06 -
- Fitch Ratings has downgraded seven and removed from Rating Watch Negative eight classes of notes issued by Libertas Preferred Funding I, Ltd. and Libertas Preferred Funding I LLC (Libertas I). These rating actions are the result of Fitch's review process and are effective immediately:
--$399,556,745 class A-1 to 'CCC' from 'BBB-';
--$66,000,000 class A-2 to 'CC' from
'BB-';
--$32,400,000 class B to 'CC' from 'B';
--$5,400,000 class C to 'CC' from 'B-';
--$24,000,000 class D to 'CC' from 'CCC+';
--$13,228,618 class E to 'CC' from 'CCC';
--$11,503,146 class F remains at 'CC';
--$8,655,186 class G to 'C' from 'CC'.
Fitch's rating actions reflect the collateral deterioration within the portfolio, specifically subprime residential mortgage-backed securities (RMBS), and structured finance (SF) collateralized debt obligations (CDOs) with underlying exposure to subprime RMBS.
Libertas I is a SF CDO that closed on May 25, 2006 and is managed by Strategos Capital Management, LLC (Strategos). Presently, 69.5% of the portfolio is comprised of 2005, 2006 and 2007 vintage U.S. subprime RMBS, 4.6% is comprised of 2005, 2006, and 2007 vintage U.S. Alternative-A (Alt-A) RMBS, and 9.7% consists of pre-2005, 2005, and 2006 vintage U.S. SF CDOs. Additionally, 3.5% of the portfolio is comprised of prime RMBS and a small percentage of the portfolio consists of commercial mortgage-backed securities (CMBS) and commercial asset-backed securities (ABS).
Since the last rating action in November 2007, 52.7% of the portfolio has been downgraded with an additional 17.1% of the portfolio currently on Rating Watch Negative. Approximately 77.5% of the portfolio is now rated below investment grade, of which 55.5% is rated 'CCC+' or below. As per the latest trustee report dated June 26, 2008, defaulted securities constitute 14.6%, or $84.3 million, of the portfolio total. The negative credit migration experienced since the last review has resulted in the Weighted Average Rating Factor (WARF) deteriorating to 'B+/B' as of the last trustee report from 'BBB/BBB-'during the last review, breaching its covenant of 'BBB/BBB-'.
Libertas I does not contain overcollateralization or interest coverage tests that would otherwise trap excess spread to pay down the notes should principal or interest coverage fall below certain pre-specified levels. However, the transaction contains a class A sequential pay test that, if triggered, requires commencement of the sequential pay period thereby diverting all principal proceeds to paydown the most senior class outstanding before other notes receive principal. Currently, the class A sequential pay test level is 81.6% and is failing the trigger of 121%. As a result, the class A-1 notes are receiving their monthly interest payments and all available principal proceeds. Fitch expects only the class A-1 notes to receive future principal distributions. The class A-2, B, C, E and F notes continue to receive interest payments, but have little prospect of any principal recovery. The class G notes are currently not receiving any interest or principal payments, and Fitch does not expect this class to receive any payments in the future.
The ratings of the class A-1, A-2, B and C notes address the likelihood that investors will receive full and timely payments of interest, as per the governing documents, as well as the stated balance of principal by the legal final maturity date. The ratings of classes D, E, F and G address the likelihood that investors will receive ultimate and compensating interest payments, as per the governing documents, as well as the stated balance of principal by the legal final maturity date. The ratings are based upon the capital structure of the transaction, the quality of the collateral, and the protections incorporated within the structure.
Fitch is reviewing its SF CDO approach and will comment separately on any changes and potential rating impact at a later date. 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
Brian Vorderbrueggen, 212-908-9102
Kevin Kendra, 212-908-0760
or
Media Relations:
Sandro Scenga, 212-908-0278
