Fitch Downgrades 3 & Affirms 7 Classes of Fall Creek CLO Ltd.

2009-11-10 20:57:02 -

Fitch Ratings affirms seven and downgrades three classes of notes issued by Fall Creek CLO LTD (Fall Creek). A detailed list of rating actions follows at the end of this press release.

This review was conducted under the framework described in the report 'Global Structured Finance Rating Criteria'. Cash flow and portfolio default modeling was conducted in accordance with Fitch's 'Global

Criteria for Cash Flow Analysis in Corporate CDOs' and 'Global Rating Criteria for Corporate CDOs'.

The affirmation of the class A-2 notes is attributed to the paydown of the notes from portfolio amortization and asset sales. As a result, credit enhancement has improved which offsets the weakening portfolio credit profile noted since the last review. The downgrade of the class B notes is due to the lower credit enhancement available to these notes as the result of losses from asset sales and lower than expected recoveries on defaulted assets. Portfolio losses currently exceed the available credit enhancement to the class C, D-1and D-2 notes. These notes are also deferring their interest payments. As such, Fitch believes payment default is inevitable for the class C, D-1 and D-2 notes.

Since Fitch's last review in December 2008, amortization and asset sales have reduced the size of the Fall Creek portfolio by approximately $87 million. Approximately $7.9 million of losses were realized from the sale of performing and defaulted assets, thus reducing par coverage for the rated notes. Additionally, credit deterioration since the last rating review has increased the overall credit risk of the portfolio.

Approximately 31% of the portfolio is considered 'CCC+' or lower, compared to 16% at the last rating review. Assets that are currently on Rating Watch Negative or Negative Rating Outlook by at least one rating agency represent 1% and 22% of the total portfolio, respectively.

Finally, exposure to defaulted assets is currently 5.7% compared to 4.4% at the last rating review.

The class A-2 note interest component is sizeable relative to the weighted average spread of the underlying portfolio. As a result, there are insufficient interest proceeds to pay the interest due to the class B notes and on the two most recent payment dates, principal proceeds were used to make interest payments to the class B notes prior to redeeming class A-2 principal. Applying principal proceeds to offset interest shortfalls reduces the principal available to the rated notes and lowers their overall asset coverage.

In its review, Fitch analyzed the structure's sensitivity to ongoing softness in U.S. corporate recoveries. To accomplish this, Fitch reduces its average recovery rate assumptions for each asset type by 30% in one sensitivity scenario and by 50% in a second sensitivity scenario where explicit Recovery Ratings were not available. The class A-2, and B notes displayed considerable sensitivity to lower recovery rates and, as such, the class A-2 notes have been assigned a Negative Outlook. In addition, Fitch noted the structure's high sensitivity to the amortization profile of the underlying assets, which also contributed to the Negative Outlook for the class A-2 notes. Fitch does not assign Outlooks to notes that are rated in distressed rating categories, rated 'CCC' or below.

The class A-2 notes were assigned a Loss Severity (LS) rating. The LS ratings indicate each 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 Fitch's 'Criteria for Structured Finance Loss Severity Ratings' report. The LS rating should always be considered in conjunction with the probability of default indicated by a class' long-term credit rating. Fitch does not assign LS ratings to tranches rated in the 'CCC' to 'C' categories.

Fall Creek is a collateralized loan obligation (CLO) that closed on Sept. 8, 2005 and was amended and restructured on Nov. 24, 2008. The portfolio is comprised of leveraged loans and is monitored by 40|86 Advisors, Inc. The Indenture for the transaction was amended and restated to remove the market value-based Threshold Value Event (TVE) trigger, effectively converting Fall Creek into a static cash flow CLO structure from the original market value CLO structure.

Fitch affirms, assigns Loss Severity (LS) ratings, and revises Outlooks on the following classes of Fall Creek CLO LTD. (all due Sept. 10, 2017) as specified below.

--$250,831,246 class A-2 term notes at 'BB/LS2'; Outlook revised to Negative from Stable;

--$2,000,000 class D-1 notes at 'C';

--$3,160,000 class D-1A notes at 'C';

--$1,697,000 class D-1B notes at 'C';

--$2,092,000 class D-1C notes at 'C';

--$8,319,000 class D-1D notes at 'C';

--$5,167,000 class D-2 notes at 'C'.

Fitch downgrades the following classes of Fall Creek CLO LTD. (all due Sept. 10, 2017).

--$29,170,000 class B notes to 'CCC' from 'B';

--$47,000,000 class C notes to 'C' from 'CC';

--$9,732,000 class C-1 notes to 'C' from 'CC'.

These rating actions reflect the application of Fitch's current criteria which are available at www.fitchratings.com : cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww .. and specifically include the following reports.

--'Global Structured Finance Rating Criteria' (September 2009);

--'Global Rating Criteria for Corporate CDOs' (April 30, 2008);

--'Global Criteria for Cash Flow Analysis in Corporate CDOs' (April 30, 2008);

--'Criteria for Structured Finance Loss Severity Ratings (February 2009).

Fitch will continue to monitor and review this transaction for future rating adjustments. Additional transaction information and historical data are also available at www.fitchratings.com : cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww .. .

Additional information is available at www.fitchratings.com : cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww .. .

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IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.FITCHRATINGS.COM : cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2FWWW .. .

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Fitch Ratings, New YorkElizabeth Nugent, +1-212-908-9157Kevin
Kendra, +1-212-908-0760orSandro Scenga, +1-212-908-0278
(Media Relations) sandro.scenga@fitchratings.com : mailto:sandro.scenga@fitchratings.com