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Announcement:

Moody's updates four key assumptions for rating U.S. CRE CDOs

04 Mar 2009

Approximately $112 billion of structured securities affected

New York, March 04, 2009 -- Moody's Investors Service (Moody's) today announced that it will update four key parameters in its rating and review of U.S. commercial real estate collateralized debt obligation transactions (CRE CDOs). The updated parameters will supplement or refine the parameter revisions adopted in December 2008 as described in the following section entitled "Background".

First, for CRE CDOs with CUSIP collateral, the additional default probability stress sometimes applied to resecuritization collateral will not be applied to Moody's review of conduit and fusion commercial mortgage backed securities (CMBS) collateral from the 2006 to 2008 vintages due to a recent ratings sweep of these transactions. Based on Moody's current expectations for commercial real estate performance, we have migrated the ratings for recent vintage CMBS to levels that we believe will remain relatively stable for the next 12 to 24 months. As such, Moody's has eliminated the vintage stress factor and default probability resecuritization stress from its analysis of deals with recent vintage CMBS collateral.

For deals with pre-2006 CMBS collateral, Moody's is adopting the default probability resecuritization stress assumptions contained within CDOROM v2.5 to capture the leveraging effect and potential ratings volatility of the underlying collateral. For CMBS, this factor is equivalent to two times the probability of default (PD) for non-Aaa and six times the PD for Aaa-rated collateral. For CRE CDOs, this factor is equivalent to four times the probability of default (PD) for non-Aaa and twelve times the PD for Aaa-rated collateral. The lower stress for CMBS is due to the historical stable performance of this asset class.

Second, in its cash flow modeling, Moody's will assume a delay in the default timing to better reflect its expectation of how the underlying real estate based collateral will perform in this recession.

Third, for CRE CDOs with non-CUSIP collateral, Moody's is eliminating the additional default probability stress in CDOROM v2.5 that is applied to corporate debt as we anticipate that the underlying non-CMBS collateral will experience lower default rates and higher recovery rates.

Fourth, for CRE CDOs with non-CUSIP collateral, Moody's is reducing the maximum over concentration stress applied to correlation factors by half due to the diversity of tenants, property types, and geographic locations inherent in the collateral pools. For those deals that are significantly less diversified, we will add back over concentration stress as warranted.

These changes bring into alignment Moody's modeling of CRE CDOs with its expectations for the performance of the underlying real estate collateral.

BACKGROUND

On December 19, 2008, Moody's placed on review for possible downgrade 109 US CRE CDOs because of weakening commercial real estate market fundamentals and revised key modeling parameters.

The revised parameters in Moody's model for rating and monitoring CRE CDOs were related to asset correlation, default probability, and recovery rate. These revisions were consistent with recent revisions to key parameters for rating and monitoring other collateralized debt obligation transactions backed by structured finance securities ("SF CDOs").

Asset Correlation As part of the revised parameters, Moody's updated its asset correlation assumption for the commercial real estate sector to be consistent with the February 3, 2009 release of one of its CRE CDO rating models, CDOROM v2.5 (for more details on the model please refer to Moody's Special Report "CDOROM v2.5 User Guide" available at www.moodys.com). Previously, the average asset correlations used for CMBS within CRE CDO deals ranged between 15% and 35%, depending on vintage and issuer diversity. In light of the systemic seizure of the credit markets, as well as higher intra industry and inter industry asset correlations, the updated correlation parameters for CRE CDOs resulted in an average range of asset correlations of between 30% and 60% for CMBS collateral.

Default Probability Default probability is typically captured in Moody's models in the collateral weighted average rating factor (WARF). In cases where CUSIP collateral is resecuritized, CDOROM v2.5 adds stress to capture the leveraging effect of the derivative transaction. In lieu of applying this resecuritization stress to all CUSIP collateral, Moody's had previously applied a vintage stress factor only to the CRE CDOs' underlying CMBS collateral issued between 2006 and 2008. This factor was equivalent to a one-half to two notch downgrade to the underlying collateral depending on the vintage and was intended to account in part for increased potential default probability and in part for the leveraging effect.

Recovery Rate In Moody's analysis of synthetic CRE CDOs, it historically employed a fixed recovery rate by the asset's original rating and tranche size. Going forward, Moody's will use a simulation based mean recovery rate based on the asset's current rating and tranche size. This is consistent with the assumptions underlying CDOROM v2.5. By simulating a range of potential recovery rates around the mean, Moody's expects to capture in its ratings more of the tail risk associated with variability of recovery rates.

TIMETABLE FOR ACTION

Moody's review of the 109 transactions that were placed on review for downgrade in December 2008 initially focused on transactions with more than 75% pool concentration in CMBS collateral and issued prior to January 2006. Moody's has completed reviews and taken action on 30 of the 109 transactions.

Having completed a ratings sweep of 2006-2008 vintage conduit and fusion CMBS deals in mid-February, Moody's is now embarking on the second phase of its CRE CDO review which will include transactions with CMBS collateral issued post-2005. Moody's will also revisit nine transactions where the previous modeling parameters were applied along with the 79 remaining CRE CDO transactions with CUSIP collateral that are currently on review for downgrade. Moody's anticipates completing reviews of all 109 transactions by March 31, 2009.

A final phase of Moody's CRE CDO ratings sweep will focus on 52 CRE CDOs collateralized primarily by non-CUSIP collateral, including whole loans, B-notes, and mezzanine debt. While initial phases of Moody's CRE CDO review involved mostly static deals, the final phase will involve transactions that have a revolving period and profile tests.

LIKELY MAGNITUDE OF RATINGS TRANSITIONS

For the 30 transactions that Moody's has completed reviews on and taken action, the Aaa-rated CRE CDO classes were downgraded by 8 to 10 notches, on average. Low investment-grade and speculative grade bonds were downgraded by 4 to 8 notches, on average.

For the remaining 79 CRE CDO transactions with CUSIP collateral, Moody's anticipates that the downgrades on all rated classes will range from 2 to 8 notches in most cases.

For deals with significant exposure to 2006-2008 vintage CMBS, the magnitude of the downgrades is expected to be at the maximum end of the range. For deals with earlier vintage CMBS collateral or a lower weighted average rating factor (WARF), the magnitude of the downgrades is expected to be at the minimum end of the range. However, other factors, such as the current credit enhancement, bond thickness, excess spread, and ratings distribution of the underlying collateral (collectively, "contributing factors"), will also influence the results.

For the 52 CRE CDOs collateralized primarily by non-CUSIP collateral, Moody's anticipates that the downgrades on all rated classes will range from 7 to 12 notches in most cases. The actual magnitude of the ratings migration will vary based on the collateral performance, contributing factors and coverage tests.

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.

This press release updates the modeling parameters in Moody's current CRE CDO methodologies:

• "U.S. CMBS: Moody's Approach to Rating Synthetic CMBS Resecuritizations" dated December 19, 2005;

• "U.S. CMBS: Moody's Approach to Rating Static CDOs Backed by Commercial Real Estate Securities" dated June 17, 2004; and

• "CMBS: Moody's Approach to Revolving Facilities in CDOs Backed by Commercial Real Estate Interests" dated July 29, 2004.

These methodologies 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.

For more information please see www.moodys.com.

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

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

Moody's updates four key assumptions for rating U.S. CRE CDOs
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