Fitch Affirms 1 & Downgrades 4 Classes of MWAM CBO Series 2001-1, Ltd.

NEW YORK -- Fitch Ratings affirms one and downgrades 4 classes of notes issued by MWAM CBO Series 2001-1, Ltd. (MWAM 2001-1). The following rating actions are effective immediately:

-- $111,225,201 class A notes affirmed at 'AAA';

-- $21,875,000 class B notes downgraded to 'B' from 'BBB-';

-- $13,616,015 class C-1 notes downgraded to 'C' from 'B-';

-- $9,284,224 class C-2 notes downgraded to 'C' from 'B-';

-- $10,500,000 preference shares downgraded to 'C' from 'CC'.

MWAM 2001-1 is a collateralized debt obligation (CDO) managed by Metropolitan West Asset Management (MWAM), which closed on Jan. 24, 2001. MWAM 2001-1 is composed of residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), asset-backed securities (ABS), CDOs, investment grade corporates, and U.S. Government securities. Included in this review, Fitch discussed the current state of the portfolio with the asset manager and their portfolio management strategy going forward. In addition, Fitch conducted cash flow modeling utilizing various default timing and interest rate scenarios to measure the breakeven default rates going forward relative to the minimum cumulative default rates required for the rated liabilities.

These downgrades reflect continued collateral deterioration resulting from negative credit migration since the last rating action in July 2005, primarily in the automotive and manufactured housing sectors. As of the January trustee report, the percentage of the portfolio rated below investment grade increased to approximately 43% from 34% as of the May 31, 2005 trustee report. Consequently, due to overcollateralization (OC) penalties for assets rated below 'BB-', the classes A, B, and C ratios have decreased to 121.3%, 103.3%, and 89.8%, respectively, as of the January trustee report, from 122.0%, 106.7%, and 95.1%, respectively, during the same period.

In addition, interest proceeds available to the rated note holders have come under stress in recent years. The classes A and B note holders benefit from a cash flow timing swap to cover any interest shortfalls to these classes, while the class C notes have been capitalizing interest payments due to failing class B coverage tests since the January 2005 payment date. This stress on interest proceeds and MWAM's mitigation strategy was described in a letter to investors dated Jan. 27, 2005. While in the current interest rate environment the effectiveness of the collateral manager's interest rate strategy is adequate, the structure is sensitive to a rapid upward spike in interest rates. The interest proceeds stress is compounded with the anticipated termination of the fixed-to-floating interest rate swap scheduled in 2008; however, a $36 million interest rate cap partially mitigates this risk.

While future interest distributions for the classes A and B note holders are secure based on the presence of the cash flow swap, reliance on the swap would require reimbursement to the counterparty with principal proceeds, if necessary. This effectively creates a situation where principal is used indirectly to repay interest, reducing the likelihood that sufficient principal will be available to ultimately repay the class B notes. Additionally, the class C note holders will likely only receive nominal future distributions, if any, and it is unlikely that the preference shares will receive any further distributions.

The rating of the class A 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. The ratings of the classes B and C notes address the likelihood that investors will receive ultimate and compensating interest payments, as per the governing documents, as well as the stated balance of principal by the legal final maturity date. The rating assigned to the Preference shares addresses the ultimate payment of principal plus the ultimate payment of a cash flow equivalent of a contingent annual coupon of 2%.

Fitch will continue to monitor and review this transaction for future rating adjustments. Additional deal information and historical data are available on the Fitch Ratings web site at www.fitchratings.com. For more information on the Fitch VECTOR Model, see 'Global Rating Criteria for Collateralised Debt Obligations,' dated Sept. 13, 2004, also available at www.fitchratings.com.

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.