Fitch Downgrades 3 Classes of MKP CBO III, Ltd.

NEW YORK -- Fitch Ratings has downgraded three classes of notes issued by MKP CBO III, Ltd. (MKP III) as a result of continued credit deterioration in the portfolio since Fitch's last rating action in August 2008. Approximately 52.8% of the portfolio has been downgraded since the last review. The details of the rating action follow at the end of this press release.

The downgrades to the portfolio have left approximately 47.5% of the portfolio with a Fitch derived rating below investment grade and 31.3% with a rating in the 'CCC' rating category or lower, compared to 24.4% and 12.8%, respectively, at last review. Defaulted securities, as defined in the transaction's governing documents, now comprise 25.7% of the portfolio, compared to 10.7% at last review.

MKP III entered an event of default on July 20, 2009 after the class A/B overcollateralization (OC) ratio declined below 100%. The necessary majority of the controlling class voted to accelerate the transaction as of Nov. 2, 2009. Therefore, on the Nov. 9, 2009 distribution date, interest and principal proceeds began diverting to redeem principal of the class A-2 notes rather than to pay class B accrued interest.

This review was conducted under the framework described in the report 'Global Rating Criteria for Structured Finance CDOs' using the Portfolio Credit Model (PCM) for projecting future default levels for the underlying portfolio. Based on this analysis, the credit enhancement available to the class A-2 notes is generally consistent with the PCM rating loss rate for the 'AA' rating category. While the class A-2 notes are benefiting from excess spread due to the transaction accelerating, the degree of deterioration within the portfolio outweighs the positive effect of amortization resulting in the downgrade.

The class A-2 notes are assigned a Negative Rating Outlook due to the high concentration of residential mortgage-backed securities (RMBS) in the portfolio, which are expected to continue to face ratings volatility in the next one to two years.

The class A-2 notes are assigned a Loss Severity (LS) rating of 'LS3'. The LS rating indicates a tranche's potential loss severity given default, as evidenced by the ratio of tranche size to the base-case loss expectation for the collateral, as explained in 'Criteria for Structured Finance Loss Severity Ratings'. The LS rating should always be considered in conjunction with the probability of default for tranches.

Due to the significant collateral deterioration, all PCM rating loss rates exceed the credit enhancement available to the class B and class C notes. For these classes, Fitch considered future payment expectations to determine their appropriate ratings.

The class B notes are downgraded to 'D' because they have defaulted on the timely interest component of their rating as of the Nov. 9, 2009 distribution date due to the acceleration. The class B notes will not receive any further distributions until the class A-2 notes are paid-in-full, at which time they will begin receiving all available interest and principal proceeds.

The class C notes are downgraded to 'C' to indicate Fitch's belief that default is inevitable at or prior to maturity. The class C notes did not receive any distributions on the Aug. 10, 2009 payment date, due to the class A/B OC ratio failing its covenant, and the Nov. 9, 2009 payment date, due to the acceleration, and are not expected to receive any proceeds going forward.

MKP III is a structured finance collateralized debt obligation (SF CDO) that closed on April 7, 2004 and is monitored by MKP Capital Management, LLC. The portfolio is primarily composed of RMBS (73.6%), commercial mortgage-backed securities (22.2%), and SF CDOs (3.6%).

Fitch has downgraded and assigned Outlooks and LS ratings as indicated:

--$45,161,527 class A-2 notes downgraded to 'AA' from 'AAA'; assigned Negative Outlook; assigned 'LS3';

--$45,000,000 class B notes downgraded to 'D' from 'BB';

--$13,031,365 class C notes downgraded to 'C' from 'CCC'.

These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com' and specifically include the following reports:

--'Global Structured Finance Rating Criteria' (Sept. 30, 2009);

--'Global Rating Criteria for Structured Finance CDOs' (Dec. 16, 2008);

--'Criteria for Structured Finance Loss Severity Ratings' (Feb. 17, 2009).

Additional information is available at 'www.fitchratings.com'.

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