Fitch Downgrades 2 Sub-Classes of Newport Waves 3; Resolves Negative Watch.

NEW YORK -- Fitch Ratings has downgraded the following sub-classes of Newport Waves CDO Series 3 and removed the notes from Rating Watch Negative. The following rating actions are effective immediately:

--CLP2,589,500,000 sub-class A6-CLP credit-linked notes due 2017, to 'BBB-' from 'A';

--CLP5,401,000,000 sub-class A7-CLP credit-linked notes due 2017, to 'BB+' from 'A-'.

The actions reflect Fitch's view on the credit risk of the rated notes following the release of its new corporate CDO rating criteria.

Key drivers of this transaction's credit risk include portfolio migration risk, with 5% of the portfolio currently on Rating Watch Negative and 21% of the portfolio with a Negative Outlook. Fitch also notes the industry concentration of 34.5% in the underperforming sector of banking & finance.

The portfolio has experienced negative rating migration, resulting in an average portfolio quality of 'BBB' compared to 'A-/BBB+' at the closing date in April 2007. Since the notes were placed on Rating Watch Negative in May 2008, 12.3% of the portfolio has experienced further downgrades. In addition, 7.8% of the portfolio carries a rating below investment grade. This compares to current credit enhancement levels of 5.2% and 4.9% for sub-classes A6-CLP and A7-CLP, respectively.

As per Fitch's May 14 press release, the Rating Watch Negative status indicated a possible downgrade to the 'BBB' category for sub-class A6-CLP and the 'BB' category for sub-class A7-CLP if there were no significant changes prior to a resolution of the Watch status. Since then, Pacific Investment Management Company LLC (PIMCO), as portfolio manager, executed substitutions on the reference portfolio, replacing 12 obligors with 11 obligors (approximately 8% of the portfolio) of higher credit quality. However, key drivers of credit risk remained relatively unchanged, as the portfolio has experienced further downgrades, causing the overall credit profile of the sub-classes to be maintained.

Newport Waves CDO (the issuer) is a managed synthetic collateralized debt obligation (CDO) referencing a portfolio of primarily investment grade corporate obligations. At close, proceeds from the issuance of the notes were used to enter into a guaranteed investment contract (GIC) with MBIA Inc., which is insured by MBIA Insurance Corp., to collateralize the credit default swap between the issuer and Bear Stearns Credit Products Inc., whose obligations are guaranteed by Bear Stearns Companies, LLC (rated 'AA-/F1+' by Fitch). Additional collateral has been posted and is marked to market on at least a weekly basis to maintain collateral levels required by the investment agreement. The portfolio is managed by PIMCO (investment grade corporate CDO asset manager rating of 'CAM1-' by Fitch).

Fitch released updated criteria on April 30 for corporate CDOs and, at that time, noted it would be reviewing its ratings accordingly to establish consistency for existing and new transactions. As part of this review, Fitch makes standard adjustments for any names on Rating Watch Negative or with a Negative Outlook, downgrading such ratings for default analysis purposes by two and one notches, respectively. Fitch has previously noted that its review will be focused first on ratings most exposed to risks it has highlighted in its updated criteria. Consequently, Fitch placed the notes on Rating Watch Negative on May 14. As previously indicated, resolution of the Rating Watch Negative status depends on any plans managers/arrangers may choose to modify either the structure or the portfolio. In this case, the manager executed trades in the portfolio as indicated above.

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