Fitch Affirms CapitalSource Commercial Loan Trust 2006-1

Fitch Ratings has affirmed three classes of notes issued by CapitalSource Commercial Loan Trust 2006-1 (CapitalSource CLT 2006-1) as follows:

--$11,808,005 class C notes 'BBBsf'; Outlook Stable;

--$24,371,449 class D notes 'Bsf'; Outlook Negative;

--$14,442,033 class E notes 'CCCsf/RR1'.

The affirmations are based on the stable performance of the transaction since Fitch's last rating action in October 2010. Since that time, the remaining classes of notes have benefited from increases of credit enhancement due to the $22.7 million of amortization that has occurred in the underlying loan portfolio. The portfolio has grown heavily concentrated in approximately $66.9 million in loans from 10 obligors. In addition, one loan was partially charged off, while another was reported as delinquent, both totaling approximately 9.4% of the outstanding loan balance, as of the September 2011 report. Fitch considers the portfolio to be primarily concentrated in low-rated obligors, carrying a weighted average rating in the 'CCC' category.

Through a combination of loan repayments and the diversion of excess spread to pay note principal, the class A and class B notes have been paid in full and approximately 82.8% of the original class C balance has been paid. Fitch maintains a Stable Rating Outlook on the note because they are well-positioned to withstand future credit deterioration in the portfolio due to their seniority and the credit enhancement available to these notes. Fitch estimates that the notes could withstand over 75% in portfolio losses before experiencing payment default.

Fitch maintains a Negative Rating Outlook on the class D notes due to the high degree of obligor concentration and the risky characteristics of the underlying portfolio. Fitch considers approximately $60.6 million loans from eight obligors as performing loans, with one loan comprising almost 50% of the performing balance. Fitch also viewed 82.2% of the performing portfolio as 'CCC', partly due to the lack of credit opinions on 21.3% of the portfolio. All the loans in the performing portfolio are senior secured loans, however, indicating strong recovery prospects upon default.

The notes of CapitalSource CLT 2006-1 benefit from credit enhancement in the form of collateral coverage, note subordination, and the application of excess spread to repay note principal. The transaction is structured to maintain 100% collateralization of the outstanding liabilities. Upon the occurrence of a charge-off in the portfolio, the payment waterfall directs combined interest and principal proceeds otherwise available to the equity to pay down the senior-most notes in an amount equal to the charged-off balance. The transaction is currently 100% collateralized, allowing the equity to receive distributions.

The class E notes maintain their Recovery Rating (RR) of 'RR1', as these notes are projected to recover at least 90% in a base-case default scenario. Recovery Ratings are designed to provide a forward-looking estimate of recoveries on currently distressed or defaulted structured finance securities rated 'CCCsf' or below. For further details on Recovery Ratings, please see Fitch's reports 'Global Rating Criteria for Corporate CDOs' and 'Criteria for Structured Finance Recovery Ratings'.

This review was conducted under the framework described in the report 'Global Rating Criteria for Corporate CDOs' using the Portfolio Credit Model (PCM) for projecting future default and recovery levels for the underlying portfolio. These default and recovery levels were then utilized in Fitch's cash flow model under various default timing and interest rate stress scenarios, as described in the report 'Global Criteria for Cash Flow Analysis in CDOs'. The default timing scenarios were also adjusted since the weighted average life of the portfolio was approximately two years. Fitch assumed that 60% of the defaults would occur in the first year and second year in the front and back default timing scenarios, respectively, and assumed that defaults would occur evenly in the mid-default timing scenario. All classes of notes passed the various stress scenarios at rating levels above their current ratings, and the class E notes passed in scenarios in line with their current ratings when obligor correlation assumptions were increased. Fitch's rating actions deviated from these modeling results, however, due to the concentration risks stated above.

CapitalSource CLT 2006-1 is a static collateralized debt obligation (CDO) that closed on April 11, 2006 and is managed and serviced by CapitalSource Finance LLC (CapitalSource). The transaction is secured by a portfolio of middle-market corporate loans, all of which are first-lien loans. None of the obligors are publicly rated; Fitch establishes model-based credit opinions for the performing loans, depending on the availability of information. Information for the credit opinions was gathered from financial statements provided to Fitch by CapitalSource.

Additional information is available at 'www.fitchratings.com'.

The information used to assess these ratings was sourced from the asset manager, periodic servicer reports, and the public domain.

Applicable Criteria and Related Research:

--'Global Structured Finance Rating Criteria' (Aug. 4, 2011);

--'Global Rating Criteria for Corporate CDOs' (Aug. 10, 2011);

--'Global Criteria for Cash Flow Analysis in CDOs' (Sept. 15, 2011);

--'Criteria for Structured Finance Recovery Ratings' (July 12, 2011);

--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (March 21, 2011).

Applicable Criteria and Related Research:

Global Structured Finance Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=646569

Global Rating Criteria for Corporate CDOs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=641789

Global Criteria for Cash Flow Analysis in CDOs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=650717

Criteria for Structured Finance Recovery Ratings

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=644902

Criteria for Interest Rate Stresses in Structured Finance Transactions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=605426

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