Fitch Downgrades & Removes $100MM of Magnolia Finance II Plc From Rating Watch Negative

2008-08-01 23:10:09 -

- Fitch Ratings downgrades and removes from Rating Watch Negative five classes of notes issued by Magnolia Finance II Plc (Magnolia II). The following rating actions are effective immediately:

--$44,000,000 series 2006-5A ABS portfolio variable rate notes to 'CC' from 'BBB';

--$40,000,000 series 2006-5B ABS portfolio variable rate notes to 'CC' from 'BB+';

--$5,000,000 series 2006-5CU ABS

portfolio variable rate notes to 'CC' from 'BB-';

--EUR5,000,000 series 2006-5CE ABS portfolio variable rate notes to 'CC' from 'BB-';

--GBP6,000,000 series 2006-5CG ABS portfolio variable rate notes to 'CC' from 'BB-'.

Magnolia II is a static synthetic structured finance (SF) collateralized debt obligation (CDO) that closed on March 30, 2006 and references a portfolio of mostly residential mortgage-backed securities (RMBS) assets. The transaction is designed to provide credit protection for realized losses on the reference portfolio through a credit default swap (CDS) between the Issuer (Magnolia II) and the swap counterparty, Credit Suisse, Cayman Islands Branch (Credit Suisse). The referenced portfolio consists of subprime RMBS, Alternative-A (Alt-A) RMBS, prime RMBS, and U.S. SF CDOs. Presently 73.1% of the portfolio is comprised of 2005 to 2007 vintage U.S. subprime RMBS, 3.7% consists of 2005 to 2007 vintage U.S. Alt-A exposure, and 2.9% consists of U.S. SF CDOs issued between 2005 and 2007.

Fitch's rating actions reflect the significant collateral deterioration within the reference portfolio, specifically subprime RMBS, Alt-A RMBS, and SF CDOs with underlying exposure to subprime RMBS. Since Fitch's last review of Magnolia II on Nov. 12, 2007, approximately 82.4% of the portfolio has been downgraded net up upgrades and 9.8% of the portfolio is currently on Rating Watch Negative. 83.8% of the portfolio is now rated below investment grade, with 54.0% being rated 'CCC+' and below. Fitch notes that, overall, 75.6% of the assets in the portfolio now carry a rating below the rating it assumed in November 2007. The negative credit migration experienced since the last review on Nov. 12, 2007 has resulted in the Weighted Average Rating Factor (WARF) deteriorating to 44.0 from 10.0 at last review.

The attachment points of the notes have increased from their respective original attachment points due to the capital structure de-levering as a result of asset amortization. However, all of the attachment points remain well below the current 'CCC' rating loss rate. In addition, there are two reference obligations that, at the discretion of the swap counterparty, may be called hard credit events as of July 25, 2008. The losses from these reference obligations go to reduce the subordination piece in the capital structure. There are also numerous other soft credit events as a result of distressed ratings downgrades. In this situation, the difference between what constitutes hard and soft credit events is that the hard credit events are rated 'Ca' for six months, or 'C' for any period of time, by Moody's, and soft credit events are rated 'CCC' or 'Caa' or below by Fitch, S&P, or Moody's. Still, the rated notes continue to receive interest as the premium payments from the swap counterparty are still received by the transaction.

The classes are removed from Rating Watch, as Fitch believes further negative migration in the portfolio will have a lesser impact on the classes. 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 series 2006-5A, series 2006-5B, series 2006-5CU, series 2006-5CE, and series 2006-5CG 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.

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
Brian Vorderbrueggen, 212-908-9102, New York
Alina Pak, 312-368-3184, Chicago
or
Media Relations:
Sandro Scenga, 212-908-0278, New York