AAA CDOs Slipping

Fitch Ratings said it is revising key VECTOR model assumptions used in its SF collateralized debt obligations rating methodology. The revised methodology will be announced next week and will be used to resolve the Rating Watch Negative actions within 30 days.

Following a comprehensive global review of the $300 billion or 431 Fitch-rated structured finance CDOs, Fitch announced Monday it placed 150 transactions or almost $37 billion in AAA-rated securities on Rating Watch Negative.

The action was mainly due to “continued credit deterioration of underlying U.S. subprime RMBS and SF CDOs, as well as Fitch’s expectation of further credit deterioration with respect to 2007 vintage U.S. subprime RMBS.”

Of the $24 billion in AAA-rated securities placed under review, about two-thirds are AAA tranches of mezzanine subprime deals, and CDO-squareds containing these tranches. The ratings of these deals are expected to suffer the most severe downgrades. A full analysis remains to be completed, but preliminary indications are that a three-to-four rating category average downgrade is to be expected for most of this group, with the revised ratings in the range of BBB to BB-.

The other $8 billion AAA-rated securities, from high grade subprime RMBS, prime/Alt-A SF CDOs, and synthetic SF CDOs of all types, are expected to average one-to-two category downgrades, with revised ratings ranging from AA to A-, Fitch said.

The remaining $5 billion or so from the overall $37 billion currently carrying ratings of AA, A, and BBB are expected to suffer downgrades to below investment grade.

On Friday, Moody’s Investors Service issued a series of press releases announcing the downgrades and placement on review for further cuts of ratings of numerous CDOs, citing “deterioration in the credit quality of the transaction’s underlying collateral pool.” Among those facing possible downgrade is Static Residential CDO 2005-C Ltd.

Standard & Poor’s Ratings Services received a subpoena from the Connecticut attorney general requesting information and documents relating to the conduct of its credit ratings business, apparently to see if the ratings agency violated the Connecticut Antitrust Act, S&P parent McGraw-Hill Cos. said in a filing with the Securities and Exchange Commission.

The attorney general also issued subpoenas to Fitch and Moody’s on Oct. 10. He seeks to determine whether the three credit rating agencies are exploiting their dominant positions to unfairly raise prices or exclude competitors, according to published reports.

Fitch downgraded and withdrew two classes worth nearly $23 billion and income notes of $56 million in Westways VIII after liquidation proceeds from the mortgage market value CDO partially paid the two classes, while the income notes recovery was in the range of less than 10 percent.

Deterioration in the relationship between credit enhancement and expected losses was cited by Fitch for $74 million in downgrades for primarily conventional loan-backed Amortizing Residential Collateral, Series 2002-BC1, 7 and 3; $195 million in downgrades for conventional loan-backed Structured Asset Investment Loan Series 2003-BC6, 7 and 13 and 2004-2, 4 and 5; about $113 million in downgrades and $66 million in classes placed on review for possible lower ratings of Alt-A loan-backed Residential Accredited Loans Inc. Series 2003-QS3, 6, 8, 11 and 13 and 2005-QS13, 2006-QS3, 4 and 9; downgrades on $11 million and placement on Rating Watch Negative of $18 million of Banc of America Funding Corp., Series 2006-D Group 1; almost $60 million in downgrades for IndyMac Bank’s RAST 2006-A14CB and A16; and downgrades of $54 million and placement of $8 million on Rating Watch Negative from Harborview Mortgage Loan Trust Series 2006-4 and 6, which is collateralized by first lien ARMs.

Moody’s said diminished protection available to subordinate bonds given the current projected losses on underlying pools led to downgrades on 17 certificates issued by SAIL 2004-1, 3, 4, 5, 7, 8, and BNC1 and placement on review for possible downgrade for four certificates of SAIL 2004-9 and 2. The deals are primarily backed by subprime first lien loans.

Significant defaults prompted downgrades by Fitch on $49 million in classes of eight U.S. deals collateralized by small balance commercial loans secured by multifamily, retail, office, and mixed use properties. The affected deals, of which a high proportion have upcoming rate resets, are CBA Commercial Series 2005-1 and 2006-1, and LaSalle Commercial Mortgage Securities Series 2006-MF2 through 4.

Fitch lowered the ratings on about $79 million or four classes of GMAC’s Commercial Mortgage Securities Inc., series 1998-C1 to reflect expected losses from the transactions’ specially serviced loan, which represents 30 percent of the outstanding transaction balance and is scheduled to mature in February 2008.

Morgan Stanley Capital I Inc., series 1999-LIFE saw $7 million in downgrades but $22 million in upgrades by Fitch. The lower ratings were due to possible losses from a specially serviced loan secured by an office property that is 60+ days delinquent, while the improved ratings reflect improved credit enhancement levels as a result of scheduled amortization, prepayment of six loans and the defeasance of an additional four loans since Fitch’s last rating action, a news release stated.

Increased loss expectations on a specially serviced loan was cited by Fitch for the downgrade of a $6 million class of Banc of America Commercial Mortgage Inc., series 2001-1, though a $19 million class received a higher rating due to additional defeasance since the last rating action.

Fitch announced it issued upgrades to two classes worth nearly $30 million of GE Commercial Mortgage Corp., series 2003-C2 due to the defeasance of 12.8 percent since its last rating action.

Moody’s issued better ratings to nearly $34 million or three classes of Salomon Brothers Securities VII Inc., Commercial Mortgage Pass-Through Certificates, Series 2000-C1 because of increased credit enhancement and an increased percentage of defeased loans.