Fitch Downgrades 1 & Affirms 3 Classes of South Coast Funding II, Ltd.

NEW YORK -- Fitch Ratings downgrades one class and affirms three classes of notes issued by South Coast Funding II, Ltd. (South Coast II).

The following rating actions are effective immediately:

-- $340,513,306 class A-1 notes affirmed at 'AAA';

-- $40,050,000 class A-2 notes affirmed at 'AAA';

-- $42,500,000 class A-3 notes affirmed at 'AA-';

-- $32,500,000 class B notes downgraded to 'BB-' from 'BBB-'.

South Coast II is a collateralized debt obligation (CDO) managed by TCW Investment Management Company (TCW). TCW is rated 'CAM1' by Fitch for managing structured finance CDOs. South Coast II has exited its reinvestment period in June of 2006. South Coast II is composed of approximately 81.4% residential mortgage backed securities (RMBS), 4.5% asset backed securities (ABS), 4.9% commercial mortgage backed securities (CMBS), 8.7% CDOs and 0.8% corporate debt. Included in this review, Fitch discussed the current state of the portfolio with the asset manager and conducted cash flow modeling utilizing various default timing, interest rate scenarios, and prepayment assumptions.

This downgrade is a result of the continuous deterioration of the underlying collateral, which outweighs the deleveraging of the transaction since the end of the reinvestment period. The Fitch weighted average rating factor (WARF) is failing at 20 ('BBB-'), which is above the trigger of 18 ('BBB/BBB-'). Further, according to Fitch's model, we project that the deal will perform poorest in the up interest rate stresses, due to the interest swap notional declining faster than the balance of the fixed rate assets.

The ratings of the class A-1, class A-2, and class A-3 notes address 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 rating of the class B notes addresses 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.

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 and also available on Fitch's web site 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.