Fitch Downgrades & Removes 14 Classes of JER CRE CDO 2006-2, Limited/LLC from Rtg Watch Negative.

NEW YORK -- Fitch Ratings has downgraded 14 classes of notes issued by JER CRE CDO 2006-2, Limited/LLC (JER CRE CDO 2006-2), as follows:

--$360,164,000 class A-FL to 'A' from 'AAA';

--$120,055,000 class B-FL to 'BB' from 'AA';

--$17,000,000 class C-FX to 'BB' from 'A+';

--$43,028,000 class C-FL to 'BB' from 'A+';

--$20,000,000 class D-FX to 'BB' from 'A';

--$28,022,000 class D-FL to 'BB' from 'A';

--$10,000,000 class E-FX to 'B' from 'A-';

--$20,014,000 class E-FL to 'B' from 'A-';

--$40,818,000 class F-FL to 'B' from 'BBB+';

--$36,017,000 class G-FL to 'B' from 'BBB';

--$13,206,000 class H-FL to 'B' from 'BBB';

--$60,027,000 class J-FX to 'B-' from 'BBB-';

--$78,036,000 class K to 'B-' from 'BB';

--$72,033,000 class L to 'B-' from 'B'.

Additionally, Fitch removed all downgraded classes from Rating Watch Negative, where they were originally placed on Jan. 16, 2008. Fitch does not rate the preferred shares.

JER CRE CDO 2006-2 is a commercial real estate collateralized debt obligation (CRE CDO) that is primarily backed by commercial mortgage backed securities (CMBS) B-pieces and commercial real estate loans (CREL) that closed on Oct. 17, 2006. CMBS B-piece resecuritizations (also referred to as first loss CRE CDOs/ReREMICs) are CRE CDOs and ReREMIC transactions that include the most junior bonds of CMBS transactions. JER Investors Trust, Inc., which is externally managed by an affiliate of J.E. Robert Company, Inc., selected the initial collateral. J.E. Robert Company, Inc., which is rated 'CSS1' as special servicer by Fitch, serves as collateral administrator and is named special servicer on twenty of the underlying transactions. JER CRE CDO 2006-2 has a five-year revolving period, which is limited to the reinvestment of principal proceeds from commercial real estate loan (CREL) assets only.

The collateral for this CDO consists of high-yielding junior bonds of CMBS transactions, CRE CDOs, Re-REMICs, CRE mezzanine loans and first-mortgage loans. The underlying assets of the CMBS bonds, by their nature, face similar exposures to losses from any downturn in the commercial real estate market as well as refinancing risks at the assets' maturity dates. As a mitigant, however, the underlying CMBS transactions do have significant geographic, property type and tenant diversity.

While Fitch continues to believe investment grade CMBS will perform well even in a heightened stress environment, the risks facing first loss (unrated) and junior rated bonds within the capital structure of CMBS transactions have increased with expectations of a rise in commercial real estate defaults from current low levels. Even a relatively modest increase in CRE losses could be material for these CMBS B-piece resecuritizations.

In reviewing CRE CDOs, Fitch has targeted expected losses in different rating stresses based on the quality of the underlying CMBS collateral. The overall expected losses reflect the single sector exposure, the concentrated nature of these portfolios, and the low expected recoveries upon bond default, especially for more junior and thinner classes of CMBS tranches. Additional ratings considerations include seasoning of underlying collateral, obligor diversity, actual bond performance and projected losses. The specific credit characteristics that are factored into Fitch's rating review are discussed below.

JER CRE CDO 2006-2 is collateralized by all or a portion of 98 classes of fixed-rate CMBS in 21 separate underlying transactions (73%), three fixed-rate subordinated classes from one CRE CDO transaction (2.9%), three fixed-rate subordinated classes from one Re-REMIC transaction (1.3%), six separate floating-rate CRE mezzanine loans (18.9%), and two floating-rate first-mortgage loans (3.9%). All performance and collateral information is based on the Mar. 2008 trustee report and discussions with the collateral administrator. The pool's obligor diversity is considered average for CMBS B-piece resecuritizations, and the vintage distribution of the CMBS collateral ranges from 2004 to 2007 (an average of 2.0 years of seasoning) with one class (0.33%) from the 1998 vintage. Approximately 51.4% of the collateral currently is rated below 'B-' or not rated, and, therefore, is more susceptible to losses in the near-term. The below 'B-' collateral also includes 19% CRE loans which have a Fitch credit assessment ranging between 'CCC' and 'CC'. Overall, a significant portion of the collateral is below investment grade with only 6.9% investment grade. JER CRE CDO 2006-2 holds 24% in the 'BB' category and 17.7% in the 'B' category.

The collateral has realized $926,417 in losses to date, which represents 0.08% of the original collateral. Although the percentage of realized losses to date is small, additional losses are projected with $157.2 million of the loans in the underlying CMBS transactions currently 60 days or more delinquent, according to the current trustee report.

Fitch conducted cash flow modeling to test the transaction's structure under various default and interest rate stress scenarios. The ratings on the class A-FL and B-FL notes address the likelihood that investors will receive full and timely payments of interest, per the governing documents, as well as the aggregate outstanding amount of principal by the state's maturity date. The ratings of the class C-FL, C-FX, D-FL, D-FX, E-FL, E-FX, F-FL, G-FL, H-FL, J-FX, K, and L notes address the likelihood that investors will receive ultimate interest, per the governing documents, as well as the aggregate outstanding amount of principal by the stated maturity date.

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.