Fitch Upgrades 1 & Affirms 3 Classes of MKP CBO III, Ltd.

NEW YORK -- Fitch Ratings has upgraded one and affirmed three classes of notes issued by MKP CBO III, Ltd (MKP III). These rating actions are the result of Fitch's review process and are effective immediately:

-- $228,315,321 class A-1 notes affirmed at 'AAA';

-- $50,000,000 class A-2 notes affirmed at 'AAA';

-- $45,000,000 class B notes affirmed at 'AA';

-- $12,902,915 class C notes upgraded to 'BBB+' from 'BBB'.

MKP III is a collateralized debt obligation (CDO) that closed April 7, 2004, and is managed by MKP Capital Management, LLC. MKP III has a quasi-static portfolio composed of 83.5% residential mortgage-backed securities, 9.8% commercial mortgage-backed securities, 3.4% asset-backed securities, and 3.3% CDOs. The asset manager has the right to trade securities based on certain provisions during the substitution period, which ends in May 2007. Included in this review, Fitch discussed the current state of the portfolio with the asset manager and their portfolio management strategy going forward.

The affirmations and upgrade are the result of significant deleveraging of the capital structure, combined with solid collateral coverage test results and portfolio performance. Since close, the A-1 noteholders have received over 16% of the original balance from principal receipts on the assets, while the class C noteholders have received over 24% of the original balance via interest proceeds due to an equity cap. These redemptions have resulted in increased credit enhancement for all notes. As of the most recent trustee report dated Feb. 28, 2006, the class A/B and C overcollateralization ratios have improved slightly to 110.4% and 106.1%, respectively, from their levels of 109.3% and 104.9%, respectively, as of the March 31, 2005 trustee report. Interest coverage levels have decreased over the same period but remain well above the minimum required thresholds.

Regarding the underlying collateral, 4.6% of the portfolio has been upgraded since close, and no collateral has been downgraded. As of the most recent trustee report available, there were no defaulted assets, and there were no assets rated below 'BBB-'. The strong performance of the underlying collateral, together with a reduced weighted average life of the portfolio, reduces the risk of future defaults.

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