Fitch Downgrades 2 Dekania Europe CDOs.

NEW YORK -- Fitch Ratings has downgraded two European collateralized debt obligations (CDOs) backed primarily by subordinate debt and perpetual preferred securities issued by insurance companies and to a lesser extent banks and finance companies.

In addition to the downgrades, Fitch has assigned Rating Outlooks and Loss Severity (LS) ratings to the notes rated 'B' and higher as follows:

Dekania Europe CDO II p.l.c. (Dekania II)

-- EUR163,538,808 class A1 to 'AA' from 'AAA'; placed on Rating Watch Evolving;

-- EUR25,000,000 class A2-A to 'BBB/LS4' from 'AAA'; Outlook Negative;

-- EUR5,000,000 class A2-B to 'BBB/LS4' from 'AAA'; Outlook Negative;

-- EUR26,000,000 class B to 'BB/LS4' from 'AA'; Outlook Negative;

-- EUR27,752,046 class C to 'B/LS5' from 'A'; Outlook Negative;

-- EUR12,389,306 class D1 to 'CCC' from 'BBB';

-- EUR1,982,289 class D2 to 'CCC' from 'BBB';

-- EUR11,893,734 class E to 'CC' from 'BB'.

Dekania Europe CDO III p.l.c. (Dekania III)

-- EUR179,820,883 class A1 to 'BB/LS3' from 'AAA'; Outlook Negative;

-- EUR16,000,000 class A2-A to 'B/LS4' from 'AAA'; Outlook Negative;

-- EUR12,000,000 class A2-B to 'B/LS4' from 'AAA'; Outlook Negative;

-- EUR24,000,000 class B to 'CCC' from 'AA-';

-- EUR18,544,409 class C to 'CCC' from 'A';

-- EUR12,200,269 class D to 'CC' from 'BBB';

-- EUR7,808,172 class E to 'CC' from 'BBB-';

-- EUR3,801,441 class F to 'CC' from 'BB-'.

The rating actions primarily reflect the rating review methodology described in the press release 'Fitch Revises Criteria For Reviewing U.S. CDOs Backed by Bank & Insurance TruPS' dated March 25, 2009. More specifically, the rating actions incorporate the impact of the first-time application of Fitch's Portfolio Credit Model (PCM) to evaluate the pool of bank and insurance corporate assets supporting the CDO notes. The PCM is Fitch's main analytical tool used to determine default, recovery and loss rates for portfolios of corporate debt. The PCM correlation framework captures the risk of industry and sector concentrations, a prevalent characteristic of bank and insurance TruPS CDOs, as well as regional and country concentrations. The application of PCM resulted in increased rating loss rates for the highly concentrated bank and insurance portfolios. The elevated rating loss rates translated into insufficient credit enhancement to support existing ratings, which resulted in the downgrades.

Fitch's rating actions are also based on observed deterioration of the underlying collateral, particularly those credits that are backed by banks and finance companies. Approximately 26% and 55% of the portfolios of Dekania Europe II and III, respectively, consist of bank and finance companies which contributed to the decline in credit quality. The weighted average rating of both portfolios declined from 'BBB-/BB+' at close to 'BB+/BB' for Dekania II and from 'BB+/BB' to 'BB/BB-' for Dekania III. Additionally, the percentage of the portfolio currently treated as 'CCC' or below by Fitch is 7.28% and 10.59% for Dekania II and III, respectively.

Both transactions are also invested in deeply subordinated perpetual preferred securities up to their maximum allowable buckets of 20% for Dekania II and 40% for Dekania III. Recovery given default for perpetual preferred securities is expected to be negligible. To date, Dekania Europe II and III have experienced one observed default by an Icelandic bank, each totaling EUR12 million or 3.97%, respectively.

Assured Guaranty provides a primary wrap for the class A1 notes of Dekania Europe II. On May 4, 2009 Fitch downgraded the Insurer Financial Strength (IFS) rating of Assured Guaranty Corp. (Assured Guaranty) to 'AA' from 'AAA' and placed it on Rating Watch Evolving. The rating on the Dekania Europe II class A1 notes has an unenhanced rating in the 'A' category. The unenhanced rating category is based on the quality of the underlying collateral as well as available credit enhancement to the tranches. Pending final resolution of the Evolving Rating Watch on Assured Guaranty's IFS rating, Fitch may shift its rating of the class A1 tranche to the higher of the unenhanced rating or the financial guarantor IFS rating.

CIFG Europe provides a primary wrap for the class A1 notes of Dekania Europe III. On Oct. 21, 2008 Fitch withdrew the IFS rating of CIFG Europe. The rating on Dekania Europe III class A1 notes reflects the unenhanced rating based on the analysis of the underlying collateral and the credit enhancement available to the tranche.

In conjunction with the downgrades, Fitch has assigned Rating Outlooks to the bonds rated 'B' and better to reflect the likely direction of any rating changes over a one- to two-year period. The Negative Rating Outlook reflects the limited ability of the notes to absorb additional defaults, as well as Fitch's overall negative outlook for the European insurance and banking sectors. Future rating actions will be largely driven by performance in terms of deferrals and defaults of the bank and insurance companies underlying these transactions.

Fitch has also assigned Loss Severity (LS) ratings to the bonds at this time. LS ratings were introduced in February 2009 to complement the existing Long-Term Credit (LTC) ratings for structured finance securities. LTC ratings exclusively address the probability of default of a security. The LS ratings provide an indication of the relative degree of loss that a security might incur in the event that the security defaults, as such it is necessary to consider loss severity (as indicated by the LS rating) in conjunction with probability of default (as indicated by the LTC rating). The LS rating scale consists of five rating categories from 'LS1' to 'LS5'. LS ratings are assigned to securities that have corresponding LTC ratings in rating categories 'AAA' through 'B'. Additional information is available in Fitch's Feb. 17 global report, 'Criteria for Structured Finance Loss Severity Ratings', 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.