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Rating Action:

Moody's Downgrades 19 CRE CDO Classes of Notes Issued by WAVE SPC

02 Feb 2010

$6.0 Billion of Structured Securities Affected

New York, February 02, 2010 -- Moody's Investors Service (Moody's) downgraded nineteen classes of Notes issued by WAVE SPC due to deterioration in the credit quality of the underlying portfolio as evidenced by an increase in the weighted average rating factor (WARF) and a decrease in the weighted average recovery rate (WARR) since our last review. Three transactions are affected: WAVE 2007-1, Ltd. (Wave 2007-1), WAVE 2007-2, Ltd. (Wave 2007-2) and WAVE 2007-3, Ltd. (Wave 2007-3). The rating action is the result of Moody's on-going surveillance of commercial real estate collateralized debt obligation (CRE CDO) transactions.

WAVE 2007-1, WAVE 2007-2 and WAVE 2007-3 are 100% backed by 2006 and 2007 vintage commercial mortgage backed securities (CMBS). As of the January 20, 2010 payment date, the aggregate collateral par amount is $6.0 billion, the same as at securitization. There have been no paydowns or losses to the collateral pools. All three Wave transactions feature a pro-rata principal payment structure among the Notes with a switch to a sequential principal payment structure upon failure of their respective senior overcollateralization and par value tests.

WAVE 2007-1 is backed by AJ tranches (95.5%) and one AM tranche (4.5%); WAVE 2007-2 is backed by AJ tranches (33.3%), AM tranches (29.2%) and Super-Senior tranches (37.5%); and WAVE 2007-3 is backed by AJ tranches (100%). AJ tranches are the junior most tranches with an original Aaa rating at securitization, AM tranches are the mezzanine tranches, typically with an original 20% credit enhancement level, that were rated Aaa at securitization. Super-Senior tranches are the senior-most tranches with an original 30% credit enhancement level, that were rated Aaa at securitization.

Recent CMBS collateral downgrades resulted in par value haircuts within each CRE CDO, causing each transaction to fail its respective senior Overcollateralization Test (OC Test). According to the most recent Trustee reports, WAVE 2007-1 is failing its Class A-1 OC Test (30.85% actual versus a trigger of 107.40%), WAVE 2007-2 is failing its Class A-1 OC Test (62.46% actual versus a trigger of 105.72%), and WAVE 2007-3 is failing its Class A-1 OC Test (29.40% actual versus a trigger of 108.67%) as well as its Net Par Value Test (27.05% actual versus a trigger of 99.89%). Due to the failure of these tests, any principal proceeds due to the respective trusts are now allocated on a sequential basis.

Moody's has identified the following parameters as key indicators of the expected loss within CRE CDO transactions: WARF, weighted average life (WAL), WARR, and MAC. These parameters are typically modeled as actual parameters for static deals and as covenants for managed deals.

WARF is a primary measure of the credit quality of a CRE CDO pool. The bottom-dollar WARF is a measure of the default probability within a collateral pool. We have completed updated credit estimates for the entire pool and the results will be reflected in future Trustee Reports.

-WAVE 2007-1: Moody's modeled a bottom-dollar WARF of 183 compared to 94 at last review. The distribution of current ratings and credit estimates is as follows: Aaa-Aa3 (9.3% compared to 12.1% at last review), A1-A3 (46.4% compared to 87.9% at last review), Baa1-Baa3 (44.2% compared to 0.0% at last review).

-WAVE 2007-2: Moody's modeled a bottom-dollar WARF of 155 compared to 41 at last review. The distribution of current ratings and credit estimates is as follows: Aaa-Aa3 (53.6% compared to 59.2% at last review), A1-A3 (28.0% compared to 40.8% at last review), Baa1-Baa3 (12.7% compared to 0.0% at last review), Ba1-Ba3 (4.9% compared to 0.0% at last review).

-WAVE 2007-3: Moody's modeled a bottom-dollar WARF of 257 compared to 95 at last review. The distribution of current ratings and credit estimates is as follows: Aaa-Aa3 (1.5% compared to 0.0% at last review), A1-A3 (63.1% compared to 100.0% at last review), Baa1-Baa3 (33.4% compared to 0.0% at last review), Ba1-Ba3 (2.0% compared to 0.0% at last review).

WAL acts to adjust the credit exposure of the collateral pool. Moody's modeled to the actual WAL of 7.4 years, 7.6 years and 7.8 years for WAVE 2007-1, WAVE 2007-2 and WAVE 2007-3, respectively compared to 8.2 years, 8.3 years and 8.5 years modeled at last review, respectively.

WARR is the par-weighted average of the mean recovery values for the collateral assets in the pool. Moody's modeled a fixed WARR of 41.1%, 56.9% and 40.8% for WAVE 2007-1, WAVE 2007-2 and WAVE 2007-3, respectively, compared to 45.4%, 61.3% and 44.3% at last review, respectively.

MAC is a single factor that describes the pair-wise asset correlations to default distribution among the instruments within the collateral pool (i.e. the measure of diversity). Moody's modeled a MAC of 64.8%, 65.4% and 63.6% for WAVE 2007-1, WAVE 2007-2 and WAVE 2007-3, respectively, the same as at last review.

Moody's review incorporated updated asset correlation assumptions for the commercial real estate sector consistent with one of Moody's CDO rating models, CDOROM v2.5, which was released on April 3, 2009. These correlations were updated in light of the systemic seizure of credit markets and to reflect higher inter- and intra-industry asset correlations. The updated asset correlations, depending on vintage and issuer diversity, used for CUSIP collateral (i.e. CMBS, CRE CDOs or real estate investment trust (REIT) debt) within CRE CDOs range from 30% to 60%, compared to 15% to 35% previously.

The cash flow model, CDOEdge v3.2, was used to analyze the cash flow waterfall and its effect on the capital structure of the deal.

Today's rating actions are as follows:

WAVE 2007-1

$2.0 Billion of Structured Securities Affected

-Class A-1, Downgraded to A1; previously on March 25, 2009 Downgraded to Aa1 from Aaa

-Class A-2, Downgraded to Ba1; previously on March 25, 2009 Downgraded to A1 from Aaa

-Class B, Downgraded to Ba3; previously on March 25, 2009 Downgraded to A3 from Aa3

-Class C, Downgraded to B1; previously on March 25, 2009 Downgraded to Baa3 from A3

-Class D, Downgraded to B3; previously on March 25, 2009 Confirmed at Baa3

WAVE 2007-2

$3.0 Billion of Structured Securities Affected

-Class A-1, Downgraded to Aa2; previously on March 30, 2009 Confirmed at Aaa

-Class A-2, Downgraded to Baa2; previously on March 30, 2009 Downgraded to Aa2 from Aaa

-Class B, Downgraded to Baa3; previously on March 30, 2009 Downgraded to Aa3 from Aaa

-Class C-FL, Downgraded to Ba1; previously on March 30, 2009 Downgraded to A2 from Aa2

-Class C-FX, Downgraded to Ba1; previously on March 30, 2009 Downgraded to A2 from Aa2

-Class D-FL, Downgraded to B1; previously on March 30, 2009 Downgraded to Baa2 from A2

-Class D-FX, Downgraded to B1; previously on March 30, 2009 Downgraded to Baa2 from A2

-Class E-FL, Downgraded to B3; previously on March 30, 2009 Downgraded to Ba1 from Baa1

-Class E-FX, Downgraded to B3; previously on March 30, 2009 Downgraded to Ba1 from Baa1

WAVE 2007-3

$1.0 Billion of Structured Securities Affected

-Class A-1, Downgraded to A2; previously on March 25, 2009 Downgraded to Aa1 from Aaa

-Class A-2, Downgraded to Ba3; previously on March 25, 2009 Downgraded to A1 from Aaa

-Class B, Downgraded to B1; previously on March 25, 2009 Downgraded to A3 from Aa2

-Class C, Downgraded to B2; previously on March 25, 2009 Downgraded to Baa3 from A3

-Class D, Downgraded to B3; previously on March 25, 2009 Confirmed at Baa3

As always, Moody's ratings are determined by a committee process that considers both quantitative and qualitative factors. The rating outcome may differ from the model output.

Moody's monitors transactions both on a monthly basis through a review of the available Trustee Reports and a periodic basis through a full review. Moody's prior reviews of these three transactions are summarized in press releases dated March 25, 2009 (WAVE 2007-1 and WAVE 2007-3) and March 30, 2009 (WAVE 2007-2).

The principal methodologies used in rating and monitoring this transaction were "U.S. CMBS: Moody's Approach to Rating Synthetic CMBS Resecuritizations" published on December 19, 2005, and "Moody's Approach to Rating SF CDOs" published on August 21, 2009, which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issue can also be found in the Rating Methodologies sub-directory on Moody's website. In addition, Moody's publishes a weekly summary of structured finance credit, ratings and methodologies, available to all registered users of our website, at www.moodys.com/SFQuickCheck.

New York
Deryk Meherik
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Michael M. Gerdes
Senior Vice President
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Downgrades 19 CRE CDO Classes of Notes Issued by WAVE SPC
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