Fitch Ratings has downgraded two classes issued by Pegasus 2007-1 Ltd. (Pegasus 2007-1) as a result of negative credit migration of the commercial mortgage-backed securities (CMBS) collateral. A complete list of rating actions follows at the end of this release.
This transaction was analyzed under the framework described in the report 'Global Rating Criteria for Structured Finance CDOs' using the Portfolio Credit Model (PCM) for projecting future default levels for the underlying portfolio. The degree of correlated default risk of this reference collateral is high given the single sector and vintage concentration. Based on this analysis and given the scant credit enhancement available to class A-1 and A-2, the credit characteristics of the bonds are consistent with the 'BB' category. Since Fitch's last rating action in February 2009, approximately 42.9% of the portfolio has been downgraded. All assets remain investment grade, with the lowest rated asset in the portfolio carrying a Fitch derived rating of 'BBB-'.
The Negative Rating Outlook on the notes reflects Fitch's expectation that underlying CMBS loans will continue to face refinance risk and maturity defaults. Fitch also assigned Loss Severity (LS) ratings to the notes. The LS ratings indicate each tranche's potential loss severity given default, as evidenced by the ratio of tranche size to the expected loss for the collateral under the 'Mean' stress. The LS rating should always be considered in conjunction with probability of default indicated by a class' long-term credit rating.
Pegasus 2007-1, issued in April 2007, is a synthetic securitization referencing a portfolio of 28 $100 million class A-M CMBS bonds. The transaction is designed to provide credit protection for realized losses on the reference portfolio through a credit default swap. An amount equal to $20,000,000 minus the aggregate amount of any actual principal writedowns is available as subordination with respect to each reference obligation. Until the writedowns related to a reference obligation exceed $20,000,000, the Issuer will not be required to pay any cash settlements upon the trigger of a credit event. To date there have been no principal writedowns.
Proceeds from the securities are invested in a pool of highly rated investments, which are currently held in a Certificate of Deposit account. Collateral market value risk is mitigated through a credit support annex (CSA) between the issuer and the CSA counterparty, Hypo Public Finance Bank.
Fitch has downgraded, assigned LS ratings, and revised Outlooks for the following classes:
--$112,000,000 class A-1 notes to 'BB/LS1' from 'BBB'; Outlook to Negative from Stable;
--$1,400,000 class A-2 notes to 'BB/LS5' from 'BBB'; Outlook to Negative from Stable.
The rating of the notes addresses the likelihood that investors will receive full and timely payments of interest, as per the governing documents, as well as the stated balance of principal by the legal final maturity date.
These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com' and specifically include the following reports:
--'Global Rating Criteria for Synthetic CDOs' (March 9, 2009);
--'Global Rating Criteria for Structured Finance CDOs' (Dec. 16, 2008).
Additional information is available at 'www.fitchratings.com'.
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