A.M. Best Places Ratings of I-Preferred Term Securities III Under Review with Negative Implications.

OLDWICK, N.J. -- A.M. Best Co. has placed the debt ratings on various senior and mezzanine notes under review with negative implications on a multi-tranche collateralized debt obligation (CDO) debt issuance (notes) co-issued by two bankruptcy remote special purpose vehicles: I-Preferred Term Securities III, Ltd. and I-Preferred Term Securities III, Inc. (issuers). (See below for a detailed listing of the ratings.)

The $328.1 million principal balance of the rated notes are collateralized by a pool of trust preferred securities, surplus notes and secondary market securities (collectively, the capital securities) primarily issued by small to medium-sized U.S. insurance entities. Capital securities, net of $20 million of defaulted securities, total $344 million, a reduction of $139 million from the original pool. The capital securities are pledged as security to the notes. Interest paid by the issuers of the capital securities is the primary source of funds to pay operating expenses of the issuer and interest on the notes. Repayment of the note principal will be funded primarily from the redemption of the capital securities.

Major considerations in rating the notes included collateral default risk and associated recoveries; structural protection through the "waterfall" and other mechanisms; counterparty swaps protection; legal documentation; and ongoing monitoring of the transaction.

These rating actions reflect (1) an increase in the number of "defaulted securities," and (2) deterioration in the issuer credit ratings of individual insurance companies within the transaction pools. Collection of both principal and outstanding unpaid interest on "defaulted securities" is less than certain. As a result, subordination levels--credit support/enhancement for the various individual debt tranches--are under stress, subjecting the lower rated debt tranches to greater risk. In addition, rising defaults decrease the availability of excess spread (i.e., interest not directed towards specific payments), which is also a credit enhancement to the various tranches of debt. In conjunction with the deterioration of issuer credit ratings of individual companies comprising the pool, the creditworthiness of the various debt tranches may be lessened.

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The principal methodologies used in determining these ratings, including any additional methodologies and factors, which may have been considered, can be found at www.ambest.com/ratings/methodology.

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Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.