Fitch downgrades and removes from Rating Watch Negative five classes of notes issued by Commodore CDO II, Ltd./Corp. (Commodore II). The following rating actions are effective immediately:
--$95,385,236 class A-1MM notes to 'BBB/F2' from 'A-/F1+';
--$24,336,366 class A-2(a) notes to 'BB' from 'BBB-';
--$772,583 class A-2(b) notes to 'BB' from 'BBB-';
--$48,600,000 class B notes to 'CC' from 'CCC';
--$8,921,225 class C notes to 'C' from 'CCC'.
Fitch's rating actions reflect the significant collateral deterioration within the portfolio, specifically from subprime residential mortgage-backed securities (RMBS).
Commodore II is a cash flow structured finance (SF) collateralized debt obligation (CDO) that closed on December 12, 2003 and is managed by Fischer Francis Trees & Watts, Inc. Currently, 29.7% of the portfolio is comprised of 2005, 2006 and 2007 vintage U.S. subprime RMBS. The portfolio also contains 28.2% asset-backed securities, 20.0% subprime RMBS collateral from pre-2005 vintages, 14.7% CDOs, and 7.4% of various other structured finance assets.
Since Fitch's last rating action on November 21, 2007, approximately 44.6% of the portfolio has been downgraded, with 5.0% of the portfolio currently on Rating Watch Negative. Additionally, 44.3% of the portfolio is now rated below investment grade, including 32.8% of the portfolio rated 'CCC+' or below. The negative credit migration experienced since the last review has resulted in the weighted average rating of the portfolio deteriorating to 'BB-/B+' from 'BBB-/BB+', breaching its minimum required average rating of between 'BBB/BBB-', as of the trustee report dated July 7, 2008.
The collateral deterioration has caused the class B and class C overcollateralization (OC) tests to fall below 100% and fail their respective triggers. As of the July 7, 2008 trustee report the class B OC ratio was 82.3% and the class C OC ratio was 78.2%. The coverage test failures are causing interest proceeds to be diverted from the class C notes in order to redeem the class A-1MM notes. Additionally, all principal proceeds are currently being used to redeem the principal balance of the class A-1MM notes.
The structural features of the transaction make it unlikely that the classes A-2a and A-2b notes will receive any additional principal proceeds unless and until the class A-1MM notes are paid-in-full. The class B notes continue to receive full interest payments, but are unlikely to receive their complete principal balances by maturity. The class C notes are not receiving any payments and are unlikely to receive significant, if any, future proceeds.
The ratings on the classes A-1MM, A-2(a), A-2(b), and B notes address the timely receipt of scheduled interest payments and the ultimate receipt of principal as per the transaction's governing documents. The rating on the class C notes addresses the ultimate receipt of interest payments and ultimate receipt of principal as per the transaction's governing documents. In addition, the short-term rating on the class A-1MM notes is based on the availability of support provided to these notes by the put agreement provided by AIG Financial Products Corp., whose payment obligations are absolutely and unconditionally guaranteed by American International Group, Inc. (rated 'AA-' Outlook Negative/'F1+' by Fitch). The availability of this put agreement is contingent upon, among other conditions, the continued fulfillment of interest payments and the ultimate payment of principal to the class A-1MM notes. The 'F2' rating indicates a satisfactory capacity for timely payment of these financial commitments.
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.
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