2008-05-07 23:46:08 -
- Fitch upgrades eight tranches and downgrades three classes of notes issued by Davis Square Funding II, Inc. (Davis Square II). The following rating actions are effective immediately:
--$74,543,003 class A-1A MT notes upgraded to 'AA-' from 'A+';
--$119,268,805 class A-1B MT notes upgraded to 'AA-' from 'A+';
--$74,543,003 class A-1C MT notes upgraded to 'AA-' from
'A+';
--$248,476,677 class A-1D MT notes upgraded to 'AA-' from 'A+';
--$544,660,876 class A-1E MT notes upgraded to 'AA-' from 'A+';
--$57,000,000 class A-2 notes downgraded to 'B' from 'AAA' and remains on Rating Watch Negative;
--$54,000,000 class B notes downgraded to 'CC' from 'A-' and removed from Rating Watch Negative;
A-1 Money Market Standby Notes:
--$0 A-1A MM notes upgraded to 'F1+' from 'F1';
--$0 A-1B MM notes upgraded to 'F1+' from 'F1';
--$0 A-1C MM notes upgraded to 'F1+' from 'F1';
--$0 A-1 LT notes downgraded to 'BB' from 'AAA' and placed on Rating Watch Negative.
Davis Square II is a high grade collateralized debt obligation (CDO) that closed on May 6, 2004 and is managed by TCW Asset Management Co. Davis Square II will end its reinvestment period in May 2008. The class A-1 notes contain three note types (money market (MM), medium-term (MT), and long-term (LT) notes) consisting of up to eighteen subclasses. The class A-1 MT and MM notes benefit from a put agreement with Wachovia Bank, NA. The puts can be exercised on the remarketing date or put date of any A-1 MT or A-1 MM notes. The ratings of the class A-1 MT notes and A-1 MM notes reflect the current long term and short term ratings of Wachovia Bank, NA (rated 'AA-/F1+' by Fitch), respectively, as a result of the put agreements. Upon the exercise or termination of the put agreements, under specific conditions, class A-1 LT notes are issued in exchange. Unlike the class A-1 MT and A-1 MM notes, the class A-1 LT notes do note benefit from any put agreement, therefore the ratings on the class A-1 LT notes, thus reflect the long term credit quality of the portfolio and structural features of the transaction. While the current balance of the A-1LT notes is $0 the notes have been downgraded to reflect the credit deterioration within the collateral portfolio, if the A-1 MT notes are rolled into class A-1LT notes upon the termination of exercise of the put agreement.
Davis Square II has a portfolio comprised primarily of subprime residential mortgage-backed securities (RMBS) bonds (39.8%), Alternative-A (Alt-A) RMBS (14.7%), prime RMBS (7.8%), structured finance (SF) CDOs (12.4%) and other structured finance assets. Subprime RMBS, Alt-A and SF CDO bonds of the 2005, 2006, and 2007 vintages account for approximately 21.1% of the portfolio. Subprime RMBS, Alt-A and SF CDO bonds of other vintages account for approximately of 45.7% the portfolio.
Fitch's rating actions reflect the significant collateral deterioration within the portfolio. Since the beginning of 2007, approximately 11.1% 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. As of the most recent trustee report dated, March 31, 2008, the weighted average rating factor of the Davis Square II is 4.00 ('BBB/BBB-') as opposed to its covenant of 1.00 ('AA/AA-'). Davis Square II is currently failing its class B interest coverage test and as a result, is using principal to pay current class B interest shortfalls as there are currently not enough interest proceeds to cover all class B interest. All principal proceeds in excess of unpaid class B interest are currently being used to amortize the class A-1 MT notes on a pro rata basis. Continued credit deterioration of the portfolio will most likely lead to failing class A coverage tests, cutting of payments to class B notes completely.
The Rating Watch Negative reflects the 9% of the portfolio currently on Rating Watch Negative in addition to 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 mortgage loans. 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-1 LT and A-2 notes address the likelihood that investors will receive full and timely payments of interest, as per the transaction's governing documents, as well as the stated balance of principal by the legal final maturity date. The ratings of the class B notes address the likelihood that investors will receive ultimate and compensating interest payments, as per the transaction's governing documents, as well as the stated balance of principal by the legal final maturity 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
Kevin Kendra, +1-212-908-0760 (New York)
Brian Vorderbrueggen, +1-212-908-9102 (New York)
Alina Pak, +1-312-368-3184 (Chicago)
Media Relations:
Sandro Scenga, +1-212-908-0278 (New York)
