Fitch Affirms 4 Classes of Solstice ABS CDO III, Ltd.

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has affirmed four classes of notes issued by Solstice ABS CDO III, Ltd. (Solstice III). Fitch has also marked one class of notes as paid-in-full (PIF), as follows:

--$0 class A-1 notes PIF;

--$100,770,203 class A-2 notes at 'Csf';

--$47,500,000 class B notes at 'Csf';

--$22,127,876 class C-1 notes at 'Csf';

--$6,529,375 class C-2 notes at 'Csf'.

The rating affirmations reflect Fitch's belief that principal shortfall continues to appear inevitable for all classes of notes at stated maturity, based on the expected losses from the distressed and defaulted assets in the portfolio (rated 'CCsf' and lower) and the reliance on recoveries on defaulted securities for the ultimate return of principal. In Fitch's view, the class A-2 and class B notes' increased credit enhancement (CE) levels, resulting from the continued de-leveraging of the capital structure, has not mitigated the effect of the portfolio deterioration.

Since Fitch's last rating action in August 2010, the credit quality of the collateral has further deteriorated, with the Trustee reported Fitch weighted average rating factor (WARF) declining to 31.6 ('B/B-') from 18.0 ('BB/BB-') at the last review and is failing the transaction's covenant of 4.0 ('BBB/BBB-'). The exposure to defaulted securities, as defined in the transaction's governing documents, has increased to 56.9% of the portfolio, from 51.6% at last review. This increase is due to a combination of additional defaults occurring and performing assets amortizing leaving a greater concentration of non-performing securities. Additionally, a portion of the principal collections continues to be used to cover shortfalls in interest collections, which is contributing to the erosion of credit enhancement. Over the last four payment dates, approximately $0.6 million of principal proceeds was used to pay part of the class B accrued interest.

In this review, Fitch used the analytical framework described in the reports 'Global Structured Finance Rating Criteria' and 'Global Rating Criteria for Structured Finance CDOs'. The Structured Finance Portfolio Credit Model (SF PCM) and Fitch's cash flow model were not utilized in the analysis of this transaction, due to the degree of credit deterioration in the underlying portfolio.

Following the redemption of the class A-1 notes in December 2010, the class A-2 notes became the senior-most class outstanding and began amortizing on the same distribution date. Since then, through the use of principal proceeds only, approximately $6.7 million, or 6.3%, of the class A-2 notes' original balance has paid down over the last three quarterly distribution dates. While the credit profile of these notes has improved since the last review, the class' current CE level is only marginally higher than the expected losses from the distressed and defaulted assets in the portfolio. Fitch believes that the ultimate repayment of the class A-2 notes' principal remains highly dependent on the amount of interest proceeds generated by the underlying pool and recoveries on the defaulted securities.

The class B notes continue to receive their timely interest payments, partially through the use of principal proceeds. Fitch expects these notes to remain current on their interest payments; however, default continues to appear inevitable as the expected losses significantly exceed the class' current CE level.

Interest payments due on the class C-1 and C-2 (together, class C) notes continue to be capitalized, with the notes' principal balances written up by $3.1 million to date. Since the last review, the class C notes' subordination has declined as a result of $1.1 million of principal writedowns on the defaulted collateral. Currently, they are undercollateralized by approximately $11.2 million.

Solstice III is a cash flow structured finance collateralized debt obligation (SF CDO) that closed on Nov. 13, 2003 and is monitored by Rabobank International. As per the June 2011 trustee report, the current portfolio is primarily composed of residential mortgage-backed securities (50.5%), corporate CDOs (28%), SF CDOs (18%), and commercial and consumer asset-backed securities (3.5%), all from the 2002 through 2006 vintage transactions.

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

The information used to assess these ratings was sourced from the issuer, periodic trustee reports, note valuation reports, and the public domain.

Applicable Criteria and Related Research:

--'Global Structured Finance Rating Criteria' (Aug. 4, 2011);

--'Global Rating Criteria for Structured Finance CDOs' (Oct. 15, 2010).

Applicable Criteria and Related Research:

Global Structured Finance Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=646569

Global Rating Criteria for Structured Finance CDOs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564895

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