Fitch Affirms CapitalSource Commercial Loan Trust 2006-2

Fitch Ratings has affirmed three classes of notes issued by CapitalSource Commercial Loan Trust 2006-2 (CapitalSource CLT 2006-2) as follows:

--$120,462,092 class C notes 'Asf'; Outlook revised to Stable from Negative;

--$101,250,000 class D notes 'BBB-sf'; Outlook Negative;

--$56,250,000 class E notes 'Bsf'; Outlook Negative.

The affirmation of the notes is based on the generally stable performance of the transaction since Fitch's last rating action in October 2010. Since that time, each remaining class of notes has benefited from increased credit enhancement levels due to the significant amortization of the underlying portfolio. However, the underlying loan portfolio is becoming increasingly concentrated in low-rated loans.

Through a combination of loan repayments and the diversion of excess spread to pay note principal, over $277 million has been repaid to the liabilities since Fitch's last rating action, including, the payment-in-full of the class A and B notes. The class C notes, which now rank senior in the capital structure, have received approximately $37 million of principal payments since Fitch's last rating action. Fitch has revised the Rating Outlook on the class C notes to Stable, reflecting the fact that they are well-positioned to withstand future credit deterioration in the portfolio due to their senior priority and the degree of overcollateralization available to these notes. As of the Sept. 20, 2011 servicer report Fitch considers the performing portfolio balance to consist of approximately $363.4 million of loans.

Approximately $134.2 million (36.9%) of the performing loans are from obligors assumed by Fitch to be rated 'CCC' or 'CC', due to the absence of a current credit opinion. These obligors have generally been in the portfolio for several years and had previously been assigned credit opinions by Fitch. Of these unrated loans $95.7 million (26.3%) are scheduled to mature over the next 12 months.

Fitch maintains Negative Rating Outlooks on the class D and E notes due to the significant proportion of assets without current Fitch credit opinions and the increasing degree of concentration in several lowly-rated obligors. While the performing loan portfolio consists of 44 unique obligors, the largest 5 obligors represent 47.8% and are all considered by Fitch to be rated 'CCC' or 'CC'. In total, assets considered 'CCC' or lower represent 61.7% of the performing portfolio, compared to 42.5% at Fitch's last rating action. The increase in 'CCC' exposure is attributable to a combination of repayments of higher-quality loans and negative credit migration in the remaining portfolio. In partial mitigation, 88.2% of the portfolio represents loans secured by a first lien in underlying collateral.

The notes of CapitalSource CLT 2006-2 benefit from credit enhancement in the form of collateral coverage, note subordination, and the application of excess spread to repay note principal. Upon the occurrence of a default in the portfolio, the payment waterfall directs part or all of the excess interest otherwise available to the equity to pay down the senior-most notes in an amount equal to the aggregate balance of defaulted assets in the portfolio.

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, D and E notes passed the various stress scenarios at rating levels above their current ratings. Fitch is affirming all of the notes and maintaining the Negative Outlook on the class D and E notes due to the concentration risks presented by the largest 5 obligors (47.8%) and the proportion of assets without current Fitch credit opinions.

CapitalSource CLT 2006-2 is a collateralized debt obligation (CDO) that closed on Sept. 28, 2006 and is managed and serviced by CapitalSource Finance LLC (CapitalSource). The transaction is in its amortization period and is secured by a portfolio of middle-market corporate loans, 88.2% of which are first-lien and 11.8% of which are second-lien or subordinate. The majority of these 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 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 Criteria for Cash Flow Analysis in CDOs

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

Criteria for Interest Rate Stresses in Structured Finance Transactions

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

Global Rating Criteria for Corporate CDOs

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

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