Fitch downgrades five classes of notes issued by Costa Bella CDO Ltd./Corp. (Costa Bella). All eight classes of Costa Bella are also removed from Rating Watch Negative. The following rating actions are effective immediately:
--$242,029,860 Class A-1 notes downgraded to 'CCC' from 'BB-' and removed from Rating Watch Negative;
--$40,000,000 Class A-2 notes downgraded to 'CC' from 'B-' and removed from Rating Watch Negative;
--$30,000,000 Class B notes downgraded to 'CC' from 'CCC+' and removed from Rating Watch Negative;
--$5,000,000 Cass C notes remain at 'CC' and removed from Rating Watch Negative;
--$23,000,000 Cass D notes remain at 'CC' and removed from Rating Watch Negative;
--$18,324,647 Cass E notes remain at 'CC' and removed from Rating Watch Negative;
--$10,525,455 Cass F notes downgraded to 'C' from 'CC' and removed from Rating Watch Negative;
--$7,581,698 Cass G notes downgraded to 'C' from 'CC' and removed from Rating Watch Negative.
Fitch's rating actions reflect the significant collateral deterioration within the portfolio specifically in subprime residential mortgage backed securities (RMBS).
Costa Bella is a hybrid structured finance (SF) collateralized debt obligation (CDO) that closed on December 1, 2006 and is managed by Pacific Invesment Management Company LLC (PIMCO). Presently 84.8% of the portfolio is comprised of U.S. subprime RMBS, 7.16% U.S. Alternative-A RMBS, 3.7% U.S. prime RMBS, 2.2% U.S. SF CDOs, 0.6% commercial mortgage backed securities, 0.6% manufactured housing and 0.8% non SF collateral.
Since November 21, 2007, approximately 60.7% of the portfolio has been downgraded with 13% of the portfolio currently on Rating Watch Negative. Of the portfolio, 85.8% is now rated below investment grade, with 74.8% of the portfolio rated 'CCC+' or below. Overall, 82.1% of the assets in the portfolio now carry a rating below the rating assumed in Fitch's November 2007 review.
Costa Bella contains no overcollateralization or interest coverage tests, however, the transaction contains a Sequential Pay Test. Failure of the Sequential Pay Test causes principal payments to the notes to be made sequentially instead of on a pro rata basis. The collateral deterioration caused the Sequential Pay ratio to fail in October 2007 and fall below 100% for the first time in April 2008, which caused an Event of Default to occur. The trustee has not been instructed to accelerate the transaction.
On the June 2008 payment date, the class A-1, B, C, D and E notes received current interest payments, although class E deferred interest was not paid. Deferred payments of interest to the class E, F and G notes have been made in kind by writing up the principal balance of each class by the amount of interest owed. To the extent the notes are not accelerated and interest proceeds are sufficient, classes A-2, B, C, D and E notes will continue receiving interest distributions. Fitch does not expect the class A-2, B, C, D or E notes to receive any principal distributions in the future. Also, although the class A-1 notes will continue to receive interest, Fitch does not expect class A-1 to receive its full principal. The downgrades to the rated notes reflect Fitch's updated view of the default risk associated with each of the notes.
Fitch is reviewing its SF CDO approach and will comment separately on any changes and potential rating impact at a later 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.
The rating of the class A-1, A-2, B and C notes addresses the likelihood that investors will receive full and timely payments of interest, as per the transaction's governing documents, as well as the stated balance of principal by the maturity date. The rating of the class D, E, F and G notes addresses the likelihood that investors will receive ultimate and compensating interest payments, as per the transaction's governing documents, as well as the stated balance of principal by the maturity date.
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.