Fitch Places Heartland CDO Series 2006-3 Notes on Rating Watch Negative

2008-05-14 03:30:59 -

- Fitch Ratings places the following class of notes from Heartland CDO Series 2006-3 (Heartland) on Rating Watch Negative as follows:

--$25,000,000 notes due 2011 rated 'AAA', is placed on Rating Watch Negative.

The action reflects Fitch's view on the credit risk of the rated notes following the release of its new Corporate CDO rating Criteria.

Key drivers of this transaction's credit risk include:

--Portfolio credit risk with an average portfolio quality of 'BBB/BBB-'. The portfolio has experienced some negative rating migration since closing with the percentage rated below investment grade increasing to 6.5%.

--Portfolio migration risk with 13.8% of the portfolio on Rating Watch Negative and 20.8% of the portfolio on Outlook Negative.

--Industry concentration of 54.5% in the three largest, made up of 30.3% in banking & finance, 15.5% in telecommunications and 8.7% in energy.

Given Fitch's view of concentration and the current credit quality of the portfolio, the current level of credit enhancement of 5.3% for the notes is not sufficient to justify the current rating of these notes.

Resolution of the Rating Watch Negative status will incorporate any changes made to the portfolio or the transaction along with additional portfolio migration. If there are no significant changes prior to the resolution of the Rating Watch Negative status, the notes will likely be downgraded to the 'BBB' category.

Heartland CDO is a partially funded synthetic CDOs referencing a portfolio of primarily investment grade corporate obligations. The portfolio maximum notional amount is USD10bn. At close, proceeds from the issuance of the notes were used to collateralise credit default swaps (CDS) between the issuer and Calyon (rated 'AA'/'F1+'). The portfolio is actively managed by Principal Global Investors.

Fitch released updated criteria on April 30, 2008 for Corporate CDOs and, at that time, noted it would be reviewing its ratings accordingly to establish consistency for existing and new transactions. As part of this review, Fitch makes standard adjustments for any names on Rating Watch Negative or Outlook Negative, reducing such ratings for default analysis purposes by two and one notch, respectively. Fitch has noted its review will be focused first on ratings most exposed to risks it has highlighted in its updated criteria. Committees are also reviewing transactions that are least impacted by the new criteria and/or portfolio migration. Resolution of these Rating Watches will depend on the plans managers/arrangers may choose to execute and communicate to address these concerns.

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
Derek Miller, 312-368-2076, Chicago
Kevin Kendra, 212-908-0760, New York
or
Media Relations:
Julian Dennison, +44 20 7862 4080, London
Sandro Scenga, 212-908-0278, New York