Fitch Ratings Affirms Flagstone CBO 2001-1 Ltd.

NEW YORK -- Fitch Ratings affirms three classes of notes issued by Flagstone CBO 2001-1 LTD (Flagstone). These affirmations are the result of Fitch's review process and are effective immediately:

-- $139,756,506 class A-1L notes at 'AAA';

-- $72,500,000 class A-2L notes at 'AAA';

-- $10,335,147 class B-1 notes at 'BB'.

Flagstone, which closed Oct. 18, 2001, is a collateralized debt obligation (CDO) initially managed by Pareto Partners. Pareto Partners was acquired by Standish Mellon which currently manages the transaction.

Since the last rating action, the WARF has slightly deteriorated; excluding defaults, assets rated 'CCC+' or lower represented approximately 17.86% of the aggregate principal amount of portfolio collateral plus eligible investments relative to 15.20% from a year ago; however, Flagstone continues to perform in line with Fitch's original ratings expectations. As of the Sept. 2, 2006 trustee report, the class A overcollateralization (OC) ratio has improved to 115.20% from 110.33% over a one-year period, relative to a minimum required threshold of 106.75%. Also, the class B OC ratio has improved to 109.60% from 104.50% over an approximate one-year period, relative to a minimum required threshold of 104.00%.

Several important structural safeguards will help support the credit enhancement of the rated liabilities. For example, if the additional collateral amount test fails the minimum required level of 107.5% based on the class B OC test, this will result in the diversion of interest proceeds towards principal redemptions of the class B-1 notes and the redemption of senior notes. The amount necessary to cure this test is applied 25% to redeem the class B-1 notes and 75% applied to redeem all the notes sequentially. The structure also includes more traditional class A and B OC tests as well as an interest coverage test.

The ratings of the classes A-1L and A-2L notes, which are both guaranteed for interest and principal by XL Capital Assurance Inc., 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-1 note 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 of Nov. 15, 2013.

As a result of this analysis, Fitch has determined that the original ratings assigned to the class A-1L, A-2L, and B-1 notes still reflect the current risk to noteholders. 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 Oct. 10, 2006, also 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.