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Rating Action:

Moody's Downgrades Seven CRE CDO Classes of CWCapital COBALT III

12 Nov 2009

Approximately $163.2 Million of Structured Securities Affected

New York, November 12, 2009 -- Moody's Investors Service (Moody's) downgraded the rating of all classes of Notes issued by CWCapital COBALT III Synthetic CDO, Ltd. The downgrades are due to deterioration in the credit quality of the underlying portfolio of reference obligations and directly held collateral. Moody's also placed Class A and Class B on review for possible further downgrade due to the uncertainty about the timing of an Event of Default (EOD) expected to be triggered by further haircuts to Par Value and potential remedies the Trustee may seek upon direction by a Majority of the Controlling Class.

On August 14, 2009 Moody's placed all rated classes of Notes on review for possible downgrade due to deterioration in the credit quality of the underlying portfolio and the potential for an EOD triggered by further haircuts to Par Value resulting from additional rating downgrades of the underlying collateral. The rating action is the result of Moody's on-going surveillance of commercial real estate collateralized debt obligation (CRE CDO) transactions.

CWCapital COBALT III Synthetic CDO, Ltd. is a hybrid collateralized debt obligation (CDO) backed by a portfolio of cash collateral (14.7% of the pool) and credit linked notes (85.3% of the pool) referencing commercial mortgage backed securities (CMBS) and CRE CDOs. As of the October 27, 2009 trustee report, the Notes are collateralized by 46 classes of CMBS cash collateral and reference obligations (90.4% of the pool) from 45 separate transactions and 8 classes of CRE CDO cash collateral and reference obligations (9.6% of the pool) from 8 separate transactions issued between 2005 and 2007.

Five cash collateral and reference obligations totaling $17.9 million (3.6% of the pool) were reported as defaulted. Moody's modelled these defaults assets assuming a 6.6% recovery rate.

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

WARF is a primary measure of the credit quality of a CRE CDO pool. We have completed updated credit estimates for the entire pool and the results will be reflected in a future Trustee Report. The WARF is a measure of the default probability within a collateral pool. Moody's modeled a bottom dollar WARF of 4,318, which is the adjusted WARF after factoring in potential ratings migration on over 12.6% of collateral and reference obligations currently placed on review for possible downgrade by Moody's, compared to 2,401 at last review. The distribution of current ratings and credit estimates is as follows: Baa1-Baa3 (16.1% compared to 38.2% at last review), Ba1-Ba3 (14.6% compared to 12.5% at last review), B1-B3 (36.6% compared to 39.3% at last review), Caa1-NR (32.7% compared to 10.0% at last review).

WAL acts to adjust the credit exposure of the collateral pool. Moody's modeled to the actual WAL of 6 years, the same as at last review.

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 6.6% compared to 11.1% at last review.

MAC is a single factor that describes the pair-wise asset correlations among the instruments within the collateral pool (i.e. the measure of diversity). Moody's modeled a MAC of 27.0% compared to 34.9% at last review.

All collateral and reference obligations are now rated at Baa3 or lower, which has resulted in over $113.4 million in par value haircuts, which is factored into the calculations of both the Overcollateralization Test and Default Par Value Coverage Ratio. As of October 27, 2009, the Trustee reports that the transaction is currently failing its Overcollateralization Test (85.88% vs. trigger of 108.94%), and passing its Default Par Value Coverage Ratio (104.09% vs. trigger of 100.00%). When the transaction fails its Overcollateralization Test, the interest due on the Class C Notes, the Class D Notes, the Class E Notes, the Class F Notes, and the Class G Notes is PIKing.

Even though the current par value haircut amount has not triggered the EOD specified in Section 5.1(j) of the Indenture, as commercial real estate loan performance continues to deteriorate, the risk of such EOD, as triggered by additional haircuts to Par Value from further credit rating downgrades to underlying collateral and reference obligations, is increasing. As provided for in Article V of the Indenture, during the occurrence and continuance of an Event of Default, a Majority of the Controlling Class to the transaction may direct the Trustee to take particular actions with respect to all or a portion of the collateral or reference obligations or rights of interest therein, including liquidation (in the case of Synthetic Assets entered into pursuant to the Synthetic Asset Agreement, designate an "Early Termination Date" under such Synthetic Asset Agreement). Moody's notes that the transaction is exposed to a significant concentration of CMBS assets, the majority of which have low investment grade and below investment grade ratings. It is also exposed to CRE CDOs with below investment grade ratings. Both types of assets have shown depressed market valuations recently and thus may result in significant losses to the transaction from any sale of cash collateral and/or any early termination of credit default swap (CDS) contracts.

Moody's will continue to closely monitor the performance of this transaction and the remedies the Trustee may exercise under the direction elected by a Majority of the Controlling Class if an EOD occurs.

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 February 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.

Today's rating actions are as follows:

-Cl. A, Downgraded to Caa3 and remains on Review for Possible Downgrade; previously on Aug 14, 2009 Ba3 Placed Under Review for Possible Downgrade

-Cl. B, Downgraded to Ca and remains on Review for Possible Downgrade; previously on Aug 14, 2009 B3 Placed Under Review for Possible Downgrade

-Cl. C, Downgraded to C; previously on Aug 14, 2009 Caa2 Placed Under Review for Possible Downgrade

-Cl. D, Downgraded to C; previously on Aug 14, 2009 Caa2 Placed Under Review for Possible Downgrade

-Cl. E, Downgraded to C; previously on Aug 14, 2009 Caa2 Placed Under Review for Possible Downgrade

-Cl. F, Downgraded to C; previously on Aug 14, 2009 Caa2 Placed Under Review for Possible Downgrade

-Cl. G, Downgraded to C; previously on Aug 14, 2009 Caa3 Placed Under Review for Possible Downgrade

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 review is summarized in a press release dated March 6, 2009.

The principal methodologies used in rating and monitoring this transaction are "U.S. CMBS: Moody's Approach to Rating Synthetic CMBS Resecuritizations" published on December 19, 2005, "U.S. CMBS: Moody's Approach to Rating Static CDOs Backed by Commercial Real Estate Securities" published on June 17, 2004, and "Moody's Approach to Rating SF CDOs" published on August 21, 2009, which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating this issue can also be found in the Credit Policy & Methodologies directory. 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 Seven CRE CDO Classes of CWCapital COBALT III
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