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Rating Action:

Moody's downgrades the ratings of $30MM notes issued by Centerline Financial LLC

13 Aug 2010

New York, August 13, 2010 -- Moody's Investors Service announced today that it has downgraded the ratings of the following notes issued by Centerline Financial LLC.

US$30M Senior Revolving Term Loan Notes, Downgraded to B3 (sf); previously on May 19, 2010 Downgraded to Baa2 (sf) and Placed Under Review for Possible Downgrade

This structured finance transaction, issued in 2006, references a portfolio consisting of credit default swap (CDS) on tax credit investments in housing projects.

The portfolio of Centerline Financial LLC consists of five Tax Credit Funds that have a total of approximately $590M in original equity contribution to tax credit funds. Centerline Financial LLC provides guarantees of an Internal Rate of Return on each of the five funds. The return of these funds is provided primarily from tax credits and losses from the properties owned by each fund. Moody's has downgraded the ratings due to deterioration in the credit quality of the portfolio based on property level information on the Tax Credit funds. Currently the amount of equity available in the deal is approximately $68 million. By comparison, properties that are on Centerline Financial LLC's watch list as of first quarter 2010 amount to $207M measured in terms of equity contribution to the tax credit fund. Of this amount, $59M are on properties with low internal ratings assigned by Centerline Financial LLC.

Moody's notes that there are approximately 70 properties referenced in the portfolio, 25 of which are currently on Centerline Financial LLC's watchlist. In addition, tax credit investments generally are expected to have low recovery on foreclosure of properties. The current portfolio has 100% exposure to the housing sector, which has demonstrated high correlation between credits in the sector, and has performed poorly under current market conditions.

The portfolio of Centerline Financial LLC consists of Tax Credit Fund properties that are not publicly rated by Moody's. A default probability rating scale is derived based on an algorithm that relies on underwritten Debt Service Coverage Ratios (DSCR) for properties that have not stabilized yet, and twelve month DSCR for stabilized properties. The Weighted Average Rating Scale of the portfolio lies in the below investment grade category.

Moody's had previously downgraded the rating of the notes due to significant credit concerns and put it on review for possible further downgrade to assess the credit risk associated with the tax credit portfolio. Since then, a CDS on one poorly performing fund has been removed from the portfolio. The CDS on the fund was novated by a transfer of the Counterparty on the CDS from Centerline Financial LLC to Centerline Financial Holdings. However, in the interim, additional properties have defaulted, and more properties that have additional risk of default have been identified.

In analyzing this transaction, Moody's assigned a default probability for each name according to the idealized corporate default rates and the default probability rating scale derived from DSCR values. Moody's used a default distribution generated by CDOROM to evaluate the expected losses for the tranches. CDOROM is based on a Monte Carlo simulation framework, within which, defaults are generated so that they occur with the frequency indicated by the default probability for each credit in the pool. Correlated defaults are simulated using a normal (or "Gaussian") copula model that applies an asset correlation framework. In addition, Moody's incorporated recovery rate assumptions that are significantly lower than the standard mean recovery rate assumption of 45% for bonds . The correlation framework as described in Moody's synthetic CDO rating methodology was used to assess the risk of the portfolio. A minimum correlation factor of approximately 20% was applied compared to 5% at closing.

Moody's says that there is a high degree of uncertainty with respect to the cash flow characteristics of guarantees of Internal Rate of Return of multiple funds based on the projected future tax credits on the properties. Additionally, the transaction has benefited from certain external support from other Centerline entities although there is also a lack of clarity regarding the continued support in the future. Taking all these into account, Moody's believes that the increased risk of the portfolio and high degree of uncertainty regarding the cash flow analysis, including assessing the default probability and recovery rate of the exposures in the portfolio, is consistent with a B3 (sf) rating.

Other methodologies and factors that may have been considered in the process of rating this issue can also be found in the Research & Ratings directory. Further information on Moody's analysis of this transaction is available on www.moodys.com. Moody's also 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
Jian Hu
MD - Structured Finance
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Sindhu Veluri
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA

Moody's downgrades the ratings of $30MM notes issued by Centerline Financial LLC
No Related Data.
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