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Standard & Poor's: Recent Events May Affect Ratings of Existing CDOs.

NEW YORK, Sept. 25 /PRNewswire/ --

Standard & Poor's today stated that the recent terrorist attacks at the World Trade Center in New York may negatively affect the ratings of a number of outstanding CDO transactions in the near-term future if obligors within certain industry categories, particularly the airline industry and the lodging industry, experience significant downward credit migration or defaults due to the impact on their businesses.

A number of arbitrage CBO and CLO transactions have collateral pools with significant exposure to debt issued by obligors within the airline and lodging categories, which means they may be negatively affected if obligors within those industries see significant downward ratings migrations or defaults as a result of recent events. On Sept. 13, Standard & Poor's placed its long-term corporate credit ratings on all domestic U.S. airlines on CreditWatch with negative implications, citing the likely adverse impact of the tragedy on passenger travel along with a potential increase in fuel costs. Citing the likelihood that the recent events may also have a significant adverse effect on obligors in the lodging industry, Standard & Poor's placed the long-term corporate credit ratings of 17 lodging companies on CreditWatch with negative implications on Sept. 21.

Given the CreditWatch placements undertaken on most of the obligors within the airline and lodging industries in recent days, transactions with large exposures to these industry categories may have seen a significant percentage of the assets within their collateral pools placed on CreditWatch with negative implications. However, Standard & Poor's emphasized that the downgrade of the obligors within these industry categories is by no means a certainty. Also, the potential effect on the ratings of any individual CDO transaction will depend upon its total exposure to obligors within these industry categories, the extent that the individual obligors within the transaction's collateral pool actually see their corporate credit ratings downgraded or default, and structural factors affecting the deals such as the level of overcollateralization and excess spread available.

In light of the recent developments affecting obligors within the airline and lodging industries, Standard & Poor's will be reviewing CDO transactions with substantial exposure to obligors in these industries in the coming weeks to assess the impact of any potential credit deterioration that may occur within the deals' collateral pools. As always, Standard & Poor's will continue to monitor the performance of all its rated CDO transactions to ensure that the credit enhancement available to support the rated notes remains consistent with the ratings assigned to the liabilities. With reference to its ratings on the individual transactions listed below, Standard & Poor's expects to either affirm or place them on CreditWatch with negative implications following their review (see list).

To date, the only cash flow CDO transaction directly affected by the events of Sept. 11 is Asian Recovery CBO I Ltd., an emerging market CBO transaction. The single-'A' rating on Asian recovery CBO I's class M notes was placed on CreditWatch with negative implications following a similar action being taken on Centre Solutions (Bermuda) Ltd., the provider of the surety bonds covering the notes. The rating action taken on Centre Solutions was due to the exposure of Zurich Insurance Group, its parent, to losses incurred because of the catastrophe at the World Trade Center in New York.

Finally, six collateral managers for Standard & Poor's rated CDO transactions were based in the World Trade Center, the World Financial Center, or in the immediately surrounding area. However, the affected managers, acting on contingency plans that were in place before the disaster, have now largely succeeded in reestablishing their operations out of new locations. One CDO trustee based in the area, Bank of New York, has also been forced out of its offices, but has suffered no loss of data. Bank of New York has indicated that it has established operations in a new location, and that payment distributions and monthly reports for its transactions should continue being released on or close to schedule with minimal disruption.

Investment-grade CBOs with more than 3% exposure to the airlines placed on CreditWatch on Sept. 13, or more than 8% exposure to airline and lodging industry obligors combined:

Balboa CDO I Ltd.

Diamond Investment Grade CDO Ltd.

Diamond Investment Grade CDO II Ltd.

Emerald Investment Grade CBO Ltd.

Emerald Investment Grade CBO II Ltd.

FMA Investment Grade Funding IV Ltd.

GIA Investment Grade CDO 2001 Ltd.

Hampden CBO Ltd.

Madison Avenue CDO II Ltd.

Solar Investment Grade CBO II Ltd.

Strong CDO III Ltd.

Valeo Investment Grade CDO I Ltd.

High-yield CBOs with more than 5% exposure to the airlines placed on CreditWatch on Sept. 13, or more than 10% exposure to airline and lodging industry obligors combined:

Dresdner RCM Global Investors CBO II Ltd.

Forte II CDO (Cayman) Ltd.

Gibraltar CBO Ltd.

ML CBO VI 1996-C-2

Northstar CBO 1997-2 Ltd.

Pilgrim America CBO I Ltd.

RMB CDO I Ltd.

Robeco CDO II Ltd.

Seneca CBO II

Signature 3 CBO Ltd.

Signature 4 CBO Ltd.

Signature 5 CBO Ltd.

Summit CBO I Ltd.

Arbitrage CLOs with more than 5% exposure to the airlines placed on CreditWatch on Sept. 13, or more than 10% exposure to airline and lodging industry obligors combined:

Archimedes Funding III Ltd.

ML CBO IV 1996-PM-1

ML CLO XV Pilgrim America (Cayman) Ltd.

Stanfield CLO Ltd.

Stanfield/RMF Transatlantic CDO Ltd.
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Publication:PR Newswire
Date:Sep 25, 2001
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