Fitch Downgrades 5 & Affirms 4 Classes of Crystal River CDO 2005-1, Ltd.

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has downgraded five and affirmed four classes of notes issued by Crystal River CDO 2005-1, Ltd. (Crystal River 2005-1) due to deterioration in the credit quality of the portfolio since last review. A detailed list of rating actions follows at the end of this release.

As of the January 2010 trustee report, the current balance of the portfolio is $201.8 million including $189.9 million in defaulted securities as defined in the transaction's governing documents. Defaulted securities now comprise 94.4% of the portfolio, compared to 36.3% at last review in March 2009. Approximately 86.9% of the portfolio has been downgraded since Fitch's last rating action, resulting in the entire portfolio carrying a below investment grade Fitch derived rating.

This review was conducted under the framework described in the reports 'Global Rating Criteria for Structured Finance CDOs' and 'Global Rating Criteria for Structured Finance CDOs', using the Structured Finance Portfolio Credit Model (SF PCM) for projecting future default levels for the underlying portfolio. Given the significant collateral deterioration, Fitch believes that the likelihood of default for all classes of notes in this transaction can be assessed without performing cash flow model analysis under the framework described in the 'Global Criteria for Cash Flow Analysis in CDOs - Amended' report. Fitch compared the respective credit enhancement levels for each rated class of notes with the amount of underlying assets considered distressed (rated 'CCC' and lower). These assets have a high probability of default and low expected recoveries upon default.

As of the December 2009 distribution date, approximately 87.8% of the class A notes' original balances have paid down. The class A notes now represent only 5.1% of the capital structure and have a credit enhancement of 92.8%. In Fitch's opinion, class A is the only class of notes which may receive a full repayment of principal assuming minimal recovery of principal on some of the defaulted assets. Given the negative outlook for the performance of the underlying assets, the Rating Outlook remains Negative.

In addition to credit deterioration of the portfolio, the transaction continues to divert a portion of the principal to pay interest rate hedge payments and interest due to classes A, B, and C, thereby reducing the amount of principal proceeds available to pay down the notes. However, this principal leakage, in the order of $.2 million at last payment, is expected to slow down as the CDO's out-of-the money interest rate hedge notional gradually steps down until its expiration in 2013.

The transaction entered an event of default (EOD) on Sept. 2, 2009, following a missed interest payment due on the class D notes due to a structural feature that prohibits using principal proceeds to pay class D notes' interest if a more senior class of notes is outstanding. As of the date of this rating action, the controlling class of notes have not accelerated the maturity.

Additionally, the class A notes are assigned a Loss Severity (LS) rating of 'LS5'. 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'. Currently, for the class A notes this ratio falls below 0.5. The LS rating should always be considered in conjunction with the notes' long-term credit rating. Fitch does not assign LS ratings to tranches rated 'CCC' and below.

The class B and C notes have the credit enhancement levels of 70.7% and 60.6%, respectively. While these classes are still receiving interest payments from principal proceeds, given the significant collateral deterioration, Fitch believes default is inevitable for both classes of notes.

The class D notes, rated to timely receipt of interest, have been in default since September 2009. Fitch does not expect the notes to receive future interest payments.

The class E, F, G, and H notes are not expected to receive any future interest or principal payments.

Crystal River 2005-1 is a cash flow collateralized debt obligation (CDO), which closed on Nov. 30, 2005 and is managed by Hyperion Crystal River Capital Advisors, LLC. The transaction exited the revolving period in December 2008. Crystal River 2005-1's current portfolio comprises commercial mortgage-backed securities (CMBS) (58.7%), subprime residential mortgage-backed securities (RMBS) (15.9%), Alternative-A (Alt-A) RMBS (13.6%), and prime RMBS (11.8%).

Fitch has taken the following rating actions on the following notes, including assigning Outlooks and LS ratings as indicated:

--$14,509,515 Class A downgraded to 'B/LS5' from 'BBB', Outlook Negative.

--$44,750,000 Class B downgraded to 'C' from 'BB',;

--$20,500,000 Class C downgraded to 'C' from 'B';

--$42,500,000 Class D-1 downgraded to 'D' from 'CCC';

--$10,000,000 Class D-2 downgraded to 'D' from 'CCC';

--$24,575,604 Class E affirmed at 'C';

--$27,141,659 Class F affirmed at 'C';

--$11,726,643 Class G affirmed at 'C';

--$5,181,540 Class H affirmed at 'C'.

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);

--'Global Criteria for Cash Flow Analysis in CDOs - Amended' (Nov. 9, 2009);

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

Additional information is available at www.fitchratings.com.

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