Fitch Affirms CapitalSource Commercial Loan Trust 2007-1; Revises Outlook and Recovery Rating

Fitch Ratings has affirmed three classes of notes issued by CapitalSource Commercial Loan Trust 2007-1 (CapitalSource CLT 2007-1) as follows:

--$48,246,626 class C notes 'BBsf'; Outlook revised to Stable from Negative;

--$27,673,474 class D notes 'B-sf'; Outlook Negative;

--$19,602,044 class E notes 'CCsf', RR revised to 'RR5' from 'RR3'.

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 $107.8 million of amortization that has occurred in the underlying loan portfolio. However, the portfolio has grown heavily concentrated in approximately $98.6 million in loans from 11 obligors. In addition, two loans from one obligor were reported as delinquent, both totaling approximately 1.9% of the outstanding loan balance, as of the September 2011 report.

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 42.6% of the original class C balance has been paid. Fitch revised the Rating Outlook to Stable from Negative on the class C notes 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 maintains a Negative Rating Outlook on the class D notes because of the high degree of obligor concentration and the risky characteristics of the underlying portfolio. Fitch considers approximately $96.7 million loans from ten obligors as performing loans, with the two largest loans comprising approximately 45.7% of the performing balance. Fitch also views the weighted average rating factor of the portfolio at 'B/B-', with12.4% of the portfolio considered at 'CCC'.

The notes of CapitalSource CLT 2007-1 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 undercollateralized by approximately $13 million, diverting all portfolio proceeds towards the sequential repayment of the notes until the transaction is back to 100% collateralization. The unrated class F notes (equity), which are the first to absorb portfolio losses, carry a balance of approximately $16.1 million, leaving an implied cushion of $3.1 million for the class E notes. This suggests a high risk of default for the class E notes if charged-off amounts continue to outpace principal repayments.

The Recovery Rating (RR) on the class E notes is revised to 'RR5' from 'RR3', as these notes are projected to recover 10-30% 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. The class C and class E notes passed the various stress scenarios at rating levels above their current ratings, but the class D notes passed in scenarios in line with their current. Fitch's rating actions deviated from these modeling results, however, due to the concentration risks stated above.

CapitalSource CLT 2007-1 is a static collateralized debt obligation (CDO) that closed on April 12, 2007 and is managed and serviced by CapitalSource Finance LLC (CapitalSource). The transaction is secured by a portfolio of middle-market corporate loans, 70.7% (of the performing balance) of which are senior secured loans and 29.3% of which are subordinate loans. Approximately 90% of the performing loans are not publicly rated; instead, Fitch establishes model-based credit opinions for the performing loans. 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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